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In the realm of prop trading, trading challenges are powerful tools that enable traders to show their performance and get funded to trade for profits on substantially larger accounts than they can afford. In prop trading, unlike Forex trading challenges, challenges are typically an evaluation phase to check if the traders have sufficient skills to be profitable under strict risk limits. In Forex trading, challenges are typically offered to increase brand recognition and give traders cash prizes when they win the competition. So, when you want to select a good challenge in prop trading, the criteria, and end goals are drastically different. Depending on your trading strategy, trading style, assets, and many other things, different types of challenges will be suited. Let’s dive deeper and analyze how you can select only the best challenge by top prop firms.
Understanding Prop Firm Trading Challenges
Trading challenges of prop firms are both a test and an opportunity for traders. These challenges are specifically designed to simulate the trading environment with specific rules, profit targets, and strict risk parameters that mimic the firm’s actual trading floor. Prop trading challenges come in different forms — some focus on Forex, while others might be focused on equities, futures, or options. The challenges usually specify a profit target, maximum drawdown limit, and a trading period. Depending on the funded account type, the daily risk limits and trading styles allowed are different. Some prop firms might restrict using certain trading strategies such as hedging, trade copiers, and EAs (automated trading robots), while others might restrict holding positions overnight or over the weekends. Many prop firms also require their traders to use stop-loss orders for each open position to protect their capital.
The benefits of trading on funded accounts with reliable prop firms are many. These benefits include access to significant trading capital without the need to invest your own money, professional growth opportunities, access to advanced trading tools, and a community of like-minded traders.
Here is how prop trading can supercharge a trader’s career:
The trader starts with a small funded account and makes profits, then they increase the funding through a scaling plan or purchasing new challenges with higher funded amounts, and so on. Now, is it difficult to become a profitable trader? Yes, surely it is no easy task and requires practice and knowledge. Is it possible to make more than the average salary with prop trading? Absolutely, it is possible to increase your funded account size and make much more money than you would get paid for on a 9 to 6 job.
Assessing Your Trading Skills and Goals
Before you sign up for a prop trading challenge, ensure to conduct a thorough self-assessment. This is critical to define what is your trading strategy, your trading style, and what are your end goals. You need to be absolutely clear about your intentions and what you aim to achieve through prop trading. Here is a brief guide on what you need to know about yourself and your trading needs before applying for any prop trading challenge:
Evaluating your skill level
Are you a beginner learning to trade, an intermediate trader with a grasp of financial market dynamics, or a seasoned trader with a proven track record? Different challenges will suit your needs. While beginners will try to start on a two-phased evaluation challenge where they test and prove their skills and start trading, pro traders will just opt for 100k and higher accounts to make good profits. Pro traders might want to buy instant funding accounts to start making profits right away without losing time in the evaluation process. Beginners are recommended to start with the evaluation phase, as these challenges are cheaper to buy and offer a unique opportunity to test trading skills before starting on a funded account.
Identifying your end goals
Whether it’s to kickstart your trading career with a prop firm, enhance your trading skills, or access larger capital, your goals will guide the choice of challenge. Prop trading offers a unique opportunity to accelerate your profits potential by providing you with large trading capital, enabling you to generate more profits with less risk. Many traders select prop trading firms for other reasons, such as recognition for their trading professionalism and fame, but the basic premise remains the same: prop firms allow traders to control much larger accounts than what theory would normally afford. Knowing your end goals will help you define how much initial funding you want and what trading conditions you need to search for.
Developing your plan to reach your goals
To achieve your goals, there are a few steps to follow: develop a trading strategy, test your strategy thoroughly, and implement strict risk-management rules. If you are a beginner trader, be sure to select a funded challenge with a modest amount to ensure the risk is not too high. For experienced traders who are focused on withdrawing large profits, 100k accounts and higher are more priority for cheaper fees.
Criteria for Selecting a Trading Challenge
Not all trading challenges are created equal, and by considering these criteria it is possible to find the one that aligns with your goals:
Duration and structure
Some challenges require reaching a profit target within a month with strict drawdown limits, while others might offer more flexible timelines. It is important to calculate how much time your trading strategy will need to reach a certain profit target set by the prop firm.
Capital requirements and scaling
Check the initial capital offered upon successful completion and the firm’s scaling plan. Many reliable prop firms allow for significant account growth based on performance milestones, typically after certain days after hitting an account’s profit target.
Risk management rules
Pay close attention to maximum drawdown limits and daily loss limits. These rules should match your risk tolerance and trading strategy. If you have a trading strategy with a lower win rate you are sure to risk very little per trade, and if your win rate is higher, then you can open larger trading positions with larger stop-loss orders. In any case, ensure you can tank 5 losing trades in a row and still have more than 95% of your funded account balance.
Costs and profit sharing
Prop challenges have one-time or monthly fees, and you need to know how much it costs to undertake certain challenges. Profit share is another critical part of prop trading where prop firms allow traders to keep a certain percentage of profits. Typically, the profit share is around 85%, meaning traders keep 85% of profits made on the funded account. Anything below 60% is disadvantageous.
Reliability and support
Buying a trading challenge from an obscure firm that has no track record of being fair is very risky. Reliability is key when starting to trade on a funded account. Some scams and frauds have hidden rules to ensure traders break the rules. These bad players typically make their money by collecting the funding account fees, and you need to only open an account with a reliable firm. Support is also essential to ensure you get solutions if something goes wrong or doesn’t work during prop trading. Reliable prop firms typically offer top-quality support with live chat and well-trained personnel which is crucial for beginners.
Most suited trading strategies for prop trading
There are plenty of trading strategies with unique risk rewards and win rates. Some strategies like trend trading might be very profitable in general FX trading, but useless in prop trading. This is because trend trading strategies have a low win rate meaning they are more susceptible to losing trading streaks. Losing 3–4 trades in a tow exposes prop traders to an increased risk of breaching the daily loss and maximum drawdown limits. Swing trading strategies, on the other hand, provide more than a 50% win rate, which decreases the chances of consecutive losses, but 3-4 losing trades are still a frequent possibility. The most suitable strategy for prop trading is one with a high win rate of at least 66% and above. Strategies with high win rates ensure traders are not experiencing consecutive losses, thereby decreasing the chances of hitting the daily loss limits that easily. Developing a scalping strategy requires careful backtesting, and you also have to take into account trading spreads and fees. Scalping strategies come also with a lower risk-reward ratio, meaning you get almost what you risk.
The right type of prop trading challenge
The most appealing challenges usually come with low-profit targets, fewer restrictions on trading strategies and overnight positions, and higher daily and maximum loss limits. For traders who are employing low win rate strategies, high daily loss limits, and maximum drawdown limits are super important. Some trading challenge accounts have no daily loss limits, and it is possible to deploy trend trading and swing trading strategies, while the majority of challenges do have daily loss limits of around 4-5% and require higher win rate strategies. So, if you find a challenge offered by a reliable firm (which you can find on our website reviews) then it is definitely possible to deploy almost any trading strategy that won’t breach the maximum drawdown rules.
Making the Decision
Right trading challenges offer traders a clear path to account growth and allow traders to test their skills. Becoming a professional prop trader is a decision and requires traders to not only select the right challenge but also sign up and test their skills. Naturally, traders need to have certain experience and well-tested strategies before applying to a challenge. Remember to trade on a free demo account first and hone your trading skills before trying to switch to live trading on prop accounts.
