How Much Should You Risk in a Prop Firm Challenge?

  • August 14, 2023
How Much Should You Risk In A Prop Firm Challenge?

Prop firm challenges are not the easiest thing in the world, but they don’t need to be the hardest thing either! We’ve seen the same mistakes made over and over again over the last few years by traders failing to keep their funded trading account, or violating rules during the challenge stage, due to failing to manage their risk. If you risk too little, it’ll take you forever to get a funded trading account. If you risk too much, you may violate your maximum drawdown rules and lose your trading account. So, how much should you be risking per trade in a prop firm challenge?  

Let’s find out…

Risk Per Trade During A Prop Firm Challenge

When you’re working with a prop firm, rather than trading for yourself, you will have a ruleset imposed upon you. This means you’re now more accountable than before and need to ensure you’re actively managing your risk within the markets. This leads traders to making some very strange decisions around the amount of risk needed per trade. Traders often try to balance the greed of using a larger lot size, with the fear of using a smaller lot size to stay in the markets for longer. Truthfully, there is a middle ground between the two which makes the perfect amount of risk to use per trade.

Having funded thousands of traders, we’ve got a fairly established process for figuring out exactly how much risk you should be using per trade. This is how our funded traders do it:  

  1. Check Your Prop Firm’s Rules

Every prop firm is going to have slightly different rules around risk. This is usually broken down into a maximum daily drawdown and a maximum total drawdown. Once one of these numbers gets violated, typically prop firms will take your account away from you. For example, our funding accounts allow you a 5% total loss limit, before you breach the rulesThis is fairly typical so whatever prop firm you’re working with will have a maximum loss limit of between 2% and 10%.

Once you are clear on the expectations, you can start crunching the numbers!  

  1. Assess Your Trading Data

You want to assess your trading data and back test samples to understand your maximum losing streak and maximum drawdown over the last few years. Why? Well, I could risk 1% per trade with my 5% maximum loss limit and easily lose 5 trades in a row. This would cost me my funding trading account. However, if I knew my maximum losing streak over the last 5 years was 10 trades, I would use 0.25% risk per trade to be safe, and I would still be in the markets, trading! It’s a basic equation – you just need to be focused on risking as little as possible and staying in the markets, alive.  

  • If your maximum losing streak over years of data was 10 trades – you have to be using less than 0.5% risk per trade to have a chance of success. I’d recommend 0.25%.
  • If your maximum losing streak over years of data was 5 trades – you have to be using less than 1% risk per trade to have a chance of success. I’d recommend 0.5%.
  • If your maximum losing streak over years of data was 20 trades – you have to be using less than 0.25% risk per trade to have a chance of success. I’d recommend 0.1%.

This is never going to be entirely accurate and can certainly still lead to you violating rules on your trading account, but it’s a start to help you understand roughly where your risk per trade should be.

If you’re trading with Lux Trading Firm as an Elite Trader, you’ll have access to a trading mentor and a risk desk too, that can help you make these decisions!

  1. Create Your Risk Management Plan

Once you have established what your risk per trade should be, this should be placed into a trading planThe trading plan should include your rules around entry, exit, stop loss placement, position management, trailing stops and risk per trade. It’s crucial that you hold yourself accountable to this and ensure your risk per trade stays consistent in every trade. No matter how good the trade appears to be, your risk needs to remain as a fixed percentage of your total balance – in accordance with your trading plan. Your risk management plan needs to be in place to keep you in the game, not make you a millionaire overnight.

  1. Use Lot Size Calculators

 You may or may not be familiar with lot size calculators but they’re a great tool to have in the toolbox if you’re looking to keep your risk management dialed in. Lot size calculators, like the calculator above from MyFxBook, allow traders to know the exact lot size they should be using for the currency pair, number of pips and percentage of their account. It takes seconds to fill in a calculator like this and will ensure you can keep your risk consistent for every trade.  

There are now lot size calculators within trading platforms too, like MetaTrader 4. For example, TraderOnChart is a useful expert advisor that many of our Elite Traders use to manage their risk per trade perfectly.

Using a lot-size calculator should be a part of your pre-trade checklist within your trading plan, to ensure you are not about to bet the house on one trade out of emotion. You must know how many pips your risk will be spread across when you use the calculator, and this can change by a few pips by the time you actually place your order. It’s not worth worrying about as over time, this will balance out to a neutral ground.

In Summary – How Much Can I Risk Per Trade On A Funded Trading Account?

In conclusion, your risk per trade depends on the following factors:

  • Your trading strategy
  • Your back test data and maximum losing streak
  • The prop firm rules

Once you have this data in place, you can establish the perfect lot size to keep you as safe as possible during prop firm trading challenges!

Are you looking to become a funded trader? Work with Lux Trading Firm today!