6 Most Common Reasons Traders Fail Prop Firm Challenges

  • July 23, 2023
6 Most Common Reasons Traders Fail Prop Firm Challenges

Prop firm challenges aren’t always easy for traders. Of course, there is a huge number of variables in this and there are some lessons traders should take away to improve their chances of passing and getting funded! At Lux Trading Firm, our Elite Traders Club has the highest pass rate in the industry – so we know what we’re talking about!

The most common reasons traders fail prop firm challenges are simply overleveraging their trades, not understanding the rules, and not having a profitable trading strategy.

In this article, we’ll break down the 6 most common reasons traders fail prop firm challenges and what you can do to avoid this happening to you. So, let’s get into it!

Why Do Traders Fail Prop Firm Trading Challenges?

The percentage of traders that pass prop firm challenges greatly depends on the prop firm in question. Prop firms with unclear rules or strict time limits on challenges will see fewer traders getting funded, than a prop firm like Lux Trading Firm that has clear rules and no time limits. As a trader, it’s your responsibility to work with a prop firm that best suits your needs as a trader. You’ve got to keep in mind that several prop firms only get paid from traders losing challenges, so they make it as hard as possible to succeed. 

On the flip side, real prop firms get paid from traders succeeding in the markets – so they’ll make it as easy as possible for consistently profitable traders to pass and get funded.  

So, let’s break down the errors traders are making in the markets…

  1. Lack Of Understanding Of The Rules

Every prop firm in the industry has rules for traders to follow. The simplicity of these rules and the fairness will depend on the firm you’re looking to engage with. Traders often ‘gloss over’ the rules and don’t spend a great deal of time reading through them. If you’ve looked at prop firm reviews on TrustPilot, you’ll see numerous traders outraged that they have had their accounts taken or failed challenges by violating rules they didn’t know existed. The blame here is on both parties. Reputable prop firms have simple rules and no additional rules designed to ‘catch out’ traders. However, traders need to ensure they’re also reading the rules of engagement before even purchasing a challenge.

Take this seriously if you’re looking to succeed for the long term!

  1. Being Too Aggressive On Positive Sizing

 Using a lot size that is too large per trade is something traders frequently do when they have the profit target in mind. However, this frequently ends up costing traders their funded accounts. Your main focus should always be on staying alive in the markets and using as little risk as possible, over the long term. By conducting a thorough back test before obtaining funding, you’ll understand your maximum drawdown and losing streak in the few hundred trades. Use that information to assume you’ll hit that maximum drawdown streak and model your risk per trade accordingly. This should keep you as ‘safe’ as possible. We have an article detailing how to manage drawdown during a prop firm challenge, that may be worth a read!

  1. Not Having A Trading Plan

You would be surprised at the number of traders that apply for prop firm funded accounts with no clear trading plan in mind. They have no idea of:

  • Trading strategy
  • Risk management plan
  • Trading psychology
  • Daily loss strategy
  • When to trade

Not knowing all of these factors is a huge issue and coupled with the increased stress of trying to get funded, it doesn’t take long for these traders to completely unravel. When trading your own capital or funded accounts, you need to have a trading plan built for success, so you can remove all of those pesky decisions every day. The less you need to think about as a trader, the better! 

  1. Using An Unprofitable Trading Strategy

Some traders just do not have a profitable trading strategy, when traded over hundreds of trades. This is where the majority of unprofitable retail traders sit. Before embarking on obtaining funding, you should have already conducted a very strict back test of your strategy, as objective as possible, over hundreds of trades to establish whether your trading system is actually profitable. If not, tweaks may have to be made before looking at funding options. Thankfully, in this day and age, there are many reports published online from trading firms with strategies outperforming the market every year. They’re usually free to get your hands on and start testing! Many traders have a winning streak of a few trades using poor risk management, seek funding and then get surprised when their strategies aren’t working – you need to take it much more seriously than this. 

  1. Having An Unavoidable Losing Streak

Some traders are profitable but just unfortunate and see a large/prolonged losing streak when applying for funded trading accounts. This is just a part of the game, and it shouldn’t deter you as a trader.  

Firstly, you need to have an idea in mind (following your back test), of your potential maximum losing streak over the last few years. Once you have this in mind, you can set your risk per position accordingly to mitigate the chance of violating your account draw down as much as possible. Even with the best risk management and will in the world, some profitable traders will still see a large losing streak and violate account rules. If you’re consistently profitable, though, it’s worth ‘getting back on the horse’ without changing your strategy! 

  1. Using The Wrong Prop Firm

As a trader, you need to conduct thorough due diligence on the prop firm you are signing up with. Typically, there are two types of online prop firms we see in the industry:

  • Demo Prop Firms
  • Real Money Prop Firms

Demo money prop firms only make money from traders failing trading challenges. Therefore, they’re incentivized to make the challenges as hard as possible to pass to drive revenue growth. Real money prop firms like Lux Trading Capital only generate revenue through profit splits shared with profitable traders. Hence, we provide all the tools, mentorship, training, analytics, and trading environment to give us as many profitable traders to work with as possible.  

Once you understand this, you can make informed decisions as to where you’re placing your trust. Don’t get fooled by seeing a $400,000 payout on Instagram – oftentimes, this cannot be replicated by the majority. 

In Summary – What Are The Reasons Traders Fail Trading Challenges?

In conclusion, these were some of the most common reasons as to why traders are failing prop firm funded challenges and how you can avoid these mistakes happening to you!

Are you interested in becoming a prop firm funded trader? Work with Lux Trading Firm now!