Proprietary firms, or prop firms, “fund” traders, allowing them to trade using a firm’s capital rather than their own. But traders are required to pass an evaluation challenge before they can access the funds. Unfortunately, you need more than just market knowledge to pass a prop firm challenge. Here is a step-by-step guide on how you can pass an evaluation challenge and kickstart your trading journey.
Understand the Rules and Regulations
First things first, you need to understand a firm’s rules and regulations. Examples include profit targets and drawdown limits.
Profit Targets: Almost all firms require traders to achieve minimum profits within the evaluation period. The profit target is typically 8-10%.
Drawdown Limits: Firms also implement strict daily and overall drawdown limits. For example, a daily drawdown limit restricts the maximum loss a trader can incur in a single day. 5-6% is a common daily drawdown limit.
Some firms also prohibit or restrict the use of Expert Advisors (EAs). Violations of any kind can lead to a delay or reduce your capital. Knowing the ins and outs of a prop firm challenge before signing up can help you successfully pass the challenge.
Build a Realistic Trading Strategy
Here’s something that might come as a shock: Passing a prop firm challenge is not about making high-risk, high-reward moves. Instead, you need to take a systematic and tested approach. Whether it’s mean reversion, scalping, or position trading, you need to test it for a sufficient period of time under various market conditions. Always conduct technical analysis and assess market conditions before making moves. This will give you an edge over other traders, increasing your chances of passing the prop firm challenge.
Prioritize Risk Management
Effective risk management is the foundation of a successful prop firm challenge. Here are some tips you can follow:
Implement Stop-Loss Orders: One of the easiest ways to manage the risk on a trade is by implementing a stop-loss order. It automatically triggers the sale of a security when the price reaches a certain level.
Define Risk Limits: Many expert traders recommend not risking more than 1% per trade. This will prevent a single bad day of trading from putting your capital at risk.
Instead of running after large wins, focus on making small, gradual moves when you’re trading with a demo account. Following consistent risk management strategies indicates a trader’s experience and maturity.
Keep a Check on Your Emotions
Passing a prop firm evaluation is emotionally challenging. The pressure of meeting profit targets and adhering to drawdown limits can lead to stress and anxiety. Many traders end up overleveraging or revenge trading. Remember that losses are unavoidable. Even the most experienced traders make mistakes. Instead of trying to recover quickly, stick to your plan and learn from what has gone wrong. Instead of chasing profit targets, focus on executing your trading strategy. Finally, evaluate your performance at the end of each day and make adjustments accordingly.
Conclusion
Passing a prop firm challenge is difficult, but not impossible. By creating a realistic trading strategy, prioritizing risk management, and practising emotional control, you can get funded and trade higher positions.
