Prop firms offer traders the opportunity to use the firm's capital through "challenge accounts." These challenges serve as a crucial stepping stone for launching a career in the fast-paced financial markets. But remember, if unprepared, these challenge accounts can be too easy to blow. So, what should you know to pass a prop firm challenge?
What Is A Prop Firm Challenge?
A prop firm challenge is a test set up by prop trading firms to see if you can handle their money. Through these challenges, they look at your trading skills, risk management strategies, adaptability to market conditions, and capability to follow the rules. If you pass, you get to trade with their cash and split the profits.
These challenges are typically structured in stages, often beginning with a smaller account size and progressing to larger capitals upon success. Evaluation metrics go beyond mere profitability; they also consider factors such as maximum drawdown and consistency of performance.
Passing these challenges requires a combination of skills, including profitability, strict adherence to risk management rules, and the ability to perform under pressure. Traders need to demonstrate their ability to generate returns and their discipline in following the firm's specific guidelines. In the following sections, we'll delve deeper into the key components necessary for successfully navigating and passing a prop firm challenge.
Key Information You Need To Know Before Starting a Challenge
Before diving into a prop firm challenge, it's crucial to arm yourself with the proper knowledge and mindset to trade efficiently. Here's what you need to know:
Firm-Specific Rules
Each prop firm has its own set of rules and expectations. Some key points to research before starting:
Drawdown limits: Drawdown limits set the maximum amount you can lose before failing the challenge. For example, let's say you're in a challenge with a $100,000 account and a 10% drawdown limit. Your maximum loss allowed is $10,000 (10% of $100,000).
Profit targets: Profit targets define the minimum profit you must make to pass the challenge. For instance, a challenge might require earning a 10% profit on a $100,000 account. This means you'd need to grow the account to $110,000 to succeed.
Trading restrictions: Trading restrictions outline limits on when or what you can trade. For example, a firm might only allow forex trading during specific market hours. Or they might restrict you to certain instruments, etc.
Time frames: Some prop firms specify how long you have to meet the challenge targets. A challenge might run for 30 days, giving you a month to hit your profit target without violating drawdown limits. Other firms offer different phases, like a shorter 'proving' phase followed by a longer 'consistency' phase.
Each prop firm has its own rules, so it’s crucial to review them before beginning to truly give yourself a winning chance when you decide to start your prop firm challenge.
Technical Skills Required
Assess your current trading skills honestly. Are you proficient in technical analysis? Can you read market trends effectively? Do you understand various trading instruments? If there are gaps in your knowledge, it's better to fill them before starting the challenge.
If you’d like to strengthen your skills before starting, we have plenty of educational resources at your fingertips. TopTier Academy is an excellent option for traders of all levels, including those who want to review concepts and refresh their trading knowledge.
Risk Management as a Skill
Prop firms are looking for traders who can protect capital as well as grow it. You'll need to demonstrate rock-solid risk management skills. This means having a clear plan for the following:
Precise Position Sizing: Decide how much money to put into each trade. You need to consider your account size, how risky the market is at the moment, and what you're trading. The goal is to ensure you're not risking too much on any single trade, because overexposure to a single position can lead to significant losses if the trade goes against you, potentially jeopardizing your entire trading account.
Stop-loss Placement: A stop-loss automatically closes your trade when the price moves a certain amount against your position. To establish the stop-loss price limit, you must consider market conditions and individual trade setups. This order type is a risk management tool for closing a trade when the price action moves unfavorably.
Overall Account Risk Control: Set limits on how much you're willing to lose in a day (daily drawdown) and how much of your account you're willing to risk overall. It's like setting a budget for your trading to make sure you don't lose too much too quickly.
The psychological demands of a prop firm challenge are significant, it’s easy to feel overwhelmed or stressed; this means that to pass, you need to work on the following:
Emotional Resilience: The ability to maintain composure and stick to your strategy during drawdown periods or when approaching profit targets.
Discipline Under Pressure: Consistently adhere to your trading plan and the firm's rules, even when faced with time constraints or performance anxiety.
Adaptive Mindset: Quickly adjusting to changing market conditions without turning to impulsive decisions.
Self-awareness: Recognizing your own psychological weaknesses and having strategies in place to counteract them.
Patience and Consistency: Avoiding the temptation to overtrade or take unnecessary risks to meet targets faster.
Initial Investments
Most prop firm challenges require a fee. However, if you pass the challenge, you’ll be trading with the firm’s capital. Make sure you're comfortable with this investment and understand the terms fully. The challenge fee varies depending on the account size you choose for your challenge.
Remember, while the challenge fee is an investment in your trading career, it's crucial only to risk capital you can afford to lose. The prospect of trading larger accounts can be alluring, but it's essential to approach prop firm challenges with a realistic assessment of your skills and financial situation.
Post-Challenge Expectations
You should determine if passing the prop challenge is worth it for you based on the firm’s terms for funded traders. Prop firms vary in their funded trader's terms in critical aspects, such as profit splits, scaling plans, and any ongoing performance requirements.
For example, here are the funded trader terms at TopTier Trader:
Profit Splits & Payouts: 80/20 profit splits, with the possibility of having your first payout in 14 or 30 days from your first trade on the funded account (depending on the funded account type). After that, payouts will be biweekly.
Scaling Plan: You can increase your simulated account size based on consistent performance and potential profit share over time.
If you start with a $100K sim account and are profitable two out of three months with a payout request of 10% or more virtual profit, you will qualify for a 25% scale increase on your sim account and a 5% profit share increase.
Performance Requirements
Lose no more than 5% of the day's starting sim balance; this would be the daily simulated drawdown limit.
Lose no more than 10% of the initial sim balance, meaning the account should not reach 90% of its initial value; this would be the maximum overall simulated drawdown limit.
Before starting, you'll be much better prepared for the prop trading challenges by thoroughly considering these factors. Remember, prop firm challenges are as much about demonstrating consistency and discipline as they are about making profits.
How To Pass a Prop Firm Challenge
Here are the steps you can follow to give you the best chance of passing prop firm challenges. But remember, although these are tips, nothing is 100% guaranteed.
1. Analyze the Prop Firm
Thoroughly research the prop trading firm you're interested in. Each has its own rules, requirements, and trader expectations.
Pay special attention to details such as risk limits, leverage restrictions, and any specific trading parameters they've set. Understanding these rules inside and out will help you avoid unintentional violations that could disqualify you from the challenge.
2. Establish Your Trading Plan
Start by defining your overall trading strategy. Articulate your approach and the reasoning behind it.
Next, outline your specific tactics. This should include:
- Criteria for entering and exiting trades
- Your risk management strategy
- Daily or weekly trading goals
- How you'll handle different market conditions
Remember, your plan should be flexible enough to adapt to changing market dynamics but structured enough to keep you disciplined.
3. Prioritize Risk Management
Develop a robust risk management framework that includes:
- Position sizing rules
- Stop-loss orders to cap potential losses
- A defined risk-reward ratio for your trades (we usually suggest 1:2 or 1:3)
- Diversification strategies to spread risk across different instruments or markets
4. Sharpen Your Analytical Edge
Success in prop trading often comes down to your ability to quickly analyze market conditions and make informed decisions. Hone your skills in technical analysis, learning to interpret charts, patterns, and indicators swiftly.
But don't stop there. You should also consider concepts that provide insightful information to make informed trades, such as fundamental factors and market sentiment. Stay informed about economic indicators, geopolitical events, and other news that could impact your trades.
5. Remember Trading Psychology
Trading is as much a mental game as it is a technical one. Cultivate discipline, patience, and emotional control. These qualities are crucial for sticking to your plan, especially during volatile market conditions.
Learn to recognize and manage trading biases. Fear and greed can be powerful forces, leading to impulsive decisions that deviate from your strategy. Develop techniques to stay calm and focused to take advantage of emerging opportunities, even when the markets are chaotic.
6. Approach the Challenge with a Long-Term Mindset
Don't rush to meet profit targets at the expense of good trading practices. Instead, focus on consistent, disciplined trading that showcases your skills and potential.
This approach not only increases your chances of passing the prop firm challenge but also aligns with the firm's goal of finding reliable and sustainable traders. By prioritizing your trading plan and making well-thought-out decisions, you'll prove your value as a trader who can perform steadily over time, rather than someone who might take unnecessary risks for short-term gains.
7. Start Small
If you're new to prop firm challenges, consider starting with a smaller account size. This allows you to gain experience and build confidence without the pressure of managing a large amount of capital. Starting small allows you to familiarize yourself with the firm's rules, trading platform, and evaluation metrics so that you can take on a bigger account and pass it.
8. Learn, Adapt, Evolve
The trading world is constantly changing, and successful traders evolve with it. Stay curious and commit to continuous learning. Keep up with market trends, new trading techniques, and emerging tools that could enhance your performance.
Treat the prop firm's feedback during or after the challenge as gold. Use their insights to refine your approach and address any weaknesses in your trading.
9. Reflect and Refine
After completing the challenge, regardless of the outcome, take time for thorough self-reflection. Analyze your performance in detail:
- Which trades were successful and why?
- Where did you struggle, and what led to those difficulties?
- How well did you adhere to your trading plan and risk management rules?
- What unexpected challenges did you face, and how did you handle them?
Use these insights to refine your strategy and prepare for future challenges or live trading. We suggest using a trading journal to track all your trades!
Books and Video Suggestions To Pass a Prop Firm Challenge
Part of being well-prepared is taking the time to research more about the topic at hand: trading. Forex trading covers a broad scope of concepts that can contribute significantly to your strategy and overall approach to the markets, which is why finding reliable resources is so important!
A few books that we suggest diving into are:
- Technical Analysis Of The Financial Markets by John J. Murphy
- Trading In The Zone by Mark Douglas
- Day Trading and Swing Trading the Currency Market by Kathy Lien
- Forex Trading: The Basics Explained in Simple Terms by Jim Brown
As well as videos for the more visual learners:
- Technical Analysis For Beginners (Trading Course) by Rayner Teo
- FX Trading Strategies (Core Concepts) by No Nonsense Forex
- Trading Psychology and the 5 Rules to follow by The Moving Average
If you want to go above and beyond, you can also enroll in TopTier Academy. This course covers every single concept you need to know to boost your trading career. For a quick overview, some of the modules we go over are: Introduction to Trading, Psychology, Forex Market, Trading Analysis, Technical Analysis, Fundamentals And much more!
After finishing this course, you’ll have an arsenal of knowledge to help you start your trading career and pass a prop firm challenge.
