It goes without saying that it’s difficult to pass a prop firm challenge. Every trader in the world would have a funded trading account if it were simple. The truth is that many traders struggle to stick to a trading plan, and as a result, they frequently fall short on prop firm challenges. There are hundreds of aspiring prop traders who both pass and fail funded account challenges, with some common occurrences between them. In this article, we will provide some tips on how to pass a prop firm challenge to help you along your trading journey.
What Is A Prop Firm Challenge?
A prop firm challenge is basically an evaluation process that you need to go through in order to show that you have the consistency and money management to reach profit target whilst not exceeding the maximum drawdown and loss. There are other criteria that you will need to fulfil, that varies depending on the prop firms challenge. This can be minimum/maximum trading days, position size, trade durations and allowed strategies.
The purpose of a prop firm trading challenge is to make sure that you are suitable to qualify for a funded account. After all, a proprietary firm cannot fund everyone because that would be too risky. Hence, the evaluation process helps them to identify the good from the bad traders. You should make sure that you feel confident enough to pass a trading challenge before you start, otherwise you can end up losing out by paying a non-refundable challenge fee.
How to Pass A Prop Firm Challenge?
There are many different ways you can pass a prop firm challenge. Some traders already have years of experience, others learn on the job and some use prop firm EAs. Whichever method you plan on using for passing a challenge, here are some tips to help.
Read the terms and conditions
This is the first and most important step in buying a funded trading account. You are likely to breach your trading account very fast if you are not aware of all the rules. We’ve observed traders blissfully oblivious to drawdown and maximum loss restrictions, which always leads to failure in a challenge. Some companies will allow you to retake a challenge without incurring additional costs, however this is highly improbable. To succeed, make sure you are fully aware of all the requirements. You should be wary of engaging with a corporation whose policies seem ambiguous or intentionally hazy. They most likely intend to deceive traders in order to gain fees.
Use sensible money management
We frequently witness traders making the mistake of speeding through obstacles. Some traders believe that taking a 1:4 position with a 2% risk is a no-brainer when considering a profit target of merely 8%. Due to the fact that it is an unsustainable method of trading the foreign exchange markets, this will frequently end in failure. It might be smart for traders to use less than 1% risk per trade as a general rule of thumb. It is far safer to use 0.25 percent every deal, if at all possible. Yes, it is possible to increase the risk in a position by up to 1%, but this method of raising money is undoubtedly more akin to high risk strategies. There are various position size calculators that you can use before opening a position in the market if you are unsure of your risk in a trade.
Use a proven trading strategy
The number of traders who “test” a method on a funded trading account challenge might surprise you, or it might not. Since you’ll be paying for the challenge, you ought to make sure that your chances of success are high. You need a back-tested trading strategy in your portfolio to be aware of this. Back-testing a trading strategy is a very valuable and data-rich technique that doesn’t take a lot of time to complete. In essence, you have no notion if you’re profitable or not if you don’t know the results of 300+ trades with an objective setup. In reality, you probably aren’t! You can increase your chances of passing a prop firm challenge by using a trading strategy has proven to be successful through different market conditions over the long-term.
Avoid correlated currency pairs
Correlated currency pairs can have a disastrous effect on trading results, and when using other people’s trading funds, you really don’t have the margin to experiment. For instance, because of the USD, USD/CAD, USD/JPY, and USD/CHF are all connected. If you decide to buy one of these pairs, you might very well be following your trading strategy and staying well within your risk tolerance. If you choose to buy on all three of these pairs, however, you run the risk of suffering a rather substantial loss in one day if something happens to the USD that causes the market to move quickly in the opposite direction of your trades. Having less risk is always a plus, but this can also go the other way around and generate enormous profits for traders when they get on the right side of these fluctuations.
Avoid trading during the news
High-impact news events like the NFP may have a significant influence on how prices move in the financial market. The problem with high-impact news events is that they can result in pretty significant market slippage. Your stop-loss prices aren’t guaranteed to be filled as a result of this slippage. Due to the lack of liquidity during these swift price changes brought on by news events, traders have been known to lose three times their real stop loss amount. However, by utilizing an economic calendar, you can keep track of all incoming news events throughout the day. Of course, you cannot be aware of black swan occurrences and their effects on the markets. If you’re going to trade during breaking news, be sure you have a stop loss in place and that you are using a prop firm that allows news trading.
Consider scaling into trades
Scaling into positions is a very complex trading strategy, yet it can frequently deliver improve profits for traders. Typically, to do this, you place a tiny amount of risk in your trading position before adjusting your stop loss to breakeven. When you reach breakeven, you move into a new position and increase the level of risk. Theoretically, this enables traders to profit more from profitable trades without ever having to take on extra risk. Although it might seem simple, doing this right requires a lot of back-testing and is actually quite difficult to achieve!
Have a trading plan and stick to it
When trying to get a funded trading account, sticking to your trading strategy like a robot is essential for success. Theoretically, any trader in the world should be able to use your trading strategy and get exactly the same outcomes in the markets as you. Your trading strategy should be comprehensive and unbiased. There shouldn’t be any subjectivity involved since doing so raises the possibility of mistakes, emotional decisions, and poor judgment. If you are a beginner, you might want to opt for a prop firm that has lots of educational resource to help you along your trading journey.
Control your emotions and be disciplined
A funded trading account’s restrictions and regulations might cause emotions to spike. Add to these feelings the knowledge that you’re probably trading with a lot more money than you ever have before. This can lead to tragedy. It’s crucial to maintain perfect objectivity in the markets, even if it might be quite difficult to achieve. You should be strictly adhering to a rule-based trading strategy, such that any trader might use it and achieve the same outcomes. The goal of this trading strategy is to entirely eliminate the sentimental and “human” component of trading. Before working with a prop firm, it will be wise to learn trading psychology if this is a challenge for you.
Practice on a demo account
As the old saying goes, practice makes perfect. There is no point trying to pass a prop firm challenge if you have no prior trading experience. You could end up paying a challenge fee for nothing and might end up breaching the rules by mistakes which could see you banned from taking another prop firm challenge. A demo trading account can be the ideal way to improve your trading skills and develop a good trading strategy without taking any unnecessary risks in the process. Once you start seeing consistent results, you may then be ready to pass a prop firm challenge.
Which Prop Firm Has No Challenge?
If you already have plenty of trading experience and feel confident enough to jump right into a funded account, there are instant funding prop firms with no challenges. This allows you to skip the evaluation process altogether and start making profits right away. If this is something you are looking for, then keep in mind that you will need to show the prop firm that you are a successful trader with a proven track record that can be verified.
How Many People Pass Prop Firm Challenges?
Whilst many people who want to make a living from prop trading have taken part in trading challenges, the reality is that the majority of them are unsuccessful. This is partly due to a lack of trading skills and experience, but also because prop firm challenges can have strict rules and unrealistic objectives. Therefore, only the very best prop traders can pass a prop firm challenge without being in breach of the terms and achieving the targets they set out.
Who Can Pass A Prop Firm Challenge?
Anyone with an internet connection and a solid trading strategy can pass a prop trading firm challenge. You just need to meet the profit targets whilst following the rules and meeting all of the other objectives. Make sure that you shop around for a prop firm that has everything you need to trade to your full potential. This includes trading platforms, financial instruments, tools, educational resources and reliable support.
There are many ways in which you can pass a prop firm challenge, including by implementing the tips that we have discussed in this article. However, because each prop firm and trader are different, the best way to pass a challenge for one person may not work for another.
It is also to not try and cheat the system by using dangerous trading strategies or by bending the rules to try and pass a prop challenge using unfair tactics. Chances are that you will get found out and could fail your trader challenge and lose your funded account.
The main thing to remember is that prop trading firms are looking for consistent traders who use sensible money management. This not only means they take on less risk, but it also means that you can have the potential to make more profit in the long run.