Table of content
Knowing how to win the prop trading challenge can help traders gain access to trading accounts and trade financial markets almost risk-free. Winning a trading challenge is a complex task, requiring traders to develop viable trading strategies and exercise powerful risk management discipline. Discipline and risk management are cornerstones of successful prop trading, helping traders not to breach rules. This guide will discuss all the necessary steps and provide pro tips on how to win a trading challenge and start trading for profits without risking your own money.
What are and how to win prop trading challenges?
Before we start, let’s differentiate between trading challenges and trading competition. Trading competitions by prop firms allow traders to show their performance and if they make the most profits win cash prizes and challenge accounts. A prop trading challenge, on the other hand, is to buy a prop trading challenge account and try to pass it. To win prop firm competition, you need first to know what those challenges are, how they work, and the most viable methods for increasing your chances of passing the challenges. Trading challenges are two types, Forex broker trading challenges, and proprietary trading challenges. Prop trading challenges just like Forex trading challenges require traders to show the best trading performance to become successful. However, the main difference is prop trading challenges require traders to trade under strict risk management rules and some other rules, making it more fierce competition. Traders are not also allowed to use all trading strategies and have to carefully plan their strategies to increase their chances of success. Prop trading challenges require traders to just hit the profit target to pass an evaluation and start trading on a funded account. The competition requires them to be among the best traders by profit percentage. Prop trading firms sometimes use challenges to attract traders to their platforms and gain public support. Traders need to sign up with the firm and then join the competition to win cash prizes and funded accounts. Typically, it’s the top 3 or 5 traders who gain maximum benefits by accessing cash prizes and challenge accounts after the competition is over. Trading challenges are easier to pass than trading competition, but traders will have to pay one-time or monthly fees, depending on the firm’s policies.
How to prepare for a prop trading challenge
To pass the trading challenge, traders need to hit a certain profit target, while for the trading competition, they need to show the best profitability. To win forex prop firm competition, traders need to prepare and plan before starting to trade on a competition account. These accounts are typically demo accounts and traders have to operate under strict risk management rules, such as daily risk limit, and maximum trailing drawdown. These rules limit the trading strategies traders can employ, as riskier strategies can breach rules, disqualifying the trader from the challenge. Let’s outline some preliminary steps before jumping into prop trading challenges and competitions.
Selecting the right prop firm
This is critical. Reliable prop firms not only allow withdrawal of the profits but offer a high-quality trading environment where participants of competitions can not abuse demo trading and win without skill. For the challenges, reliable prop firms ensure traders can withdraw profits and form a long-term relationship with the firm. Scam firms will just try to gain attention and attraction and will collect fees for trading challenges, and declining withdrawals. To find reliable firms, traders can check online reviews and trader feedback. When seeking to win trading competition prop firm selection plays a major role. Some firms offer only futures, while others only allow Forex and cryptos. Traders who trade on stocks will not be profitable on Forex or any other markets right away and it is essential to select a prop firm that is reliable and offers suitable instruments.
Trading rules
Right after defining the prop trading firm as reliable and safe, it is time to check its trading rules and risk limits. This is critical as it allows traders to anticipate trading conditions and profit targets they will have to achieve. Some firms might have strict rules that make it impossible to hit the profit target in a reasonable time.
Instruments and platforms available
Every trader has their preferred instruments they love to trade. It is also important to focus on fewer instruments to increase the chances of winning. Ensuring the firm offers your preferred instrument is crucial to passing the challenge or winning the prop trading competition.
Spreads and fees
Low spreads and commissions are another critical part of prop trading. If the risks are tough and traders need to adopt scalping methods to quickly capitalize on market movements, high spreads will make it difficult for them to achieve profitability and pass a challenge.
Customer support
During the evaluation or a trading competition, traders might need help to solve any issues. This is especially true for trading competitions where different issues and bugs might arise, especially if the firm is new and launched a trading competition for the first time. Responsive and well-trained personnel are crucial parts of quickly addressing all inquiries. Live chat is an essential form of support that all prop firms must offer.
Technical analysis is crucial
If you want to win prop firm trading competition, you need to master technical analysis. This is also true for passing the prop trading challenge. Technical analysis refers to the practice of analyzing the price using mathematical formulas and other technical tools. The most popular technical analysis method is to use technical indicators to understand price movement dynamics and make predictions. Among retail Forex investors, technical analysis is more popular than fundamental analysis. Technical analysis is crucial for traders who want to win prop trading competitions, as these competitions have limited time constraints, requiring traders to make profits quicker than any investment strategy can afford.
Fundamental analysis briefly explained
Fundamental analysis is another powerful tool to accelerate traders’ ability to win trading challenge competitions. It allows traders and mainly investors to analyze macroeconomic and global political dynamics and their impact on certain asset prices. From a perspective of retail Forex prop trading, fundamental analysis refers to using an economic calendar to constantly monitor major economic news releases. Many prop firms also prohibit trading during the news, and knowing when the high-impact news is released can become crucial for successful trading. By monitoring the economic calendar, traders can analyze the macroeconomic factors affecting price and define how these factors affect the current trends in the market. News such as inflation rates, interest rates, GDP growth, and employment rates have a profound impact on the currency and stock prices and can overturn already established trends in the price. The inflation rate directly impacts both currency markets and stock markets, making it very important to detect the current rate and anticipate the interest rate decisions. If inflation is high, stock prices tend to rise while currencies lose their value. Central banks try to lower inflation rates by increasing interest rates, which is negatively reflected on stock markets while being bullish for the currency.
Risk management strategies
Risk management is the main skill to win trading challenge competitions easily. Strict risk management skills and discipline are the number one most significant skills in financial trading, no matter the assets traded. Prop traders have to be even more careful when trying to pass the challenge or win prop firm trading competitions. This is why traders are advised to always use stop-loss orders, no matter the trading strategy. Some trading plans might allow traders to close positions manually, but having a stop-loss is still mandatory. This is for citations where the markets experience sudden increases in volatility or traders lose an internet connection. Just set a stop-loss at the nearest point of your manual stop zone. However, risk management is not about stop-loss alone. Traders need to know about risk-to-reward ratio, win rates, and position sizing. Higher win rate strategies allow traders to win most trading positions but typically come with lower risk-reward ratios. Lower win rate strategies need to have higher risk-reward ratios of 1:2 or more to stay profitable. Position sizing allows traders to open positions with manageable amounts and stay within the risk management rules. Many prop firms also have a mandatory stop-loss rule and won’t allow open positions with more than certain lot sizes.
Developing a winning trading strategy
Developing a profitable trading strategy might not be enough to pass the prop evaluation or win prop firm trading competition. Traders need to take into account prop trading rules of daily risk limits, maximum drawdown, and prohibition on certain trading strategies. When trying to not lose more than 4% per day, you need to have a strategy that allows you to win most trades. Scalping strategies are known for higher win rates and are most suited for prop trading competitions and challenges. The first thing is to have a clear understanding of the parameters you are going to operate within. Develop an idea of trading setups you can capitalize on, and then conduct a thorough backtesting to check its performance on historic price data. To make this process easier and streamlined, let’s list steps for creating a viable trading strategy that can pass challenges:
- Step 1. Develop a trading idea — Search for various trading methods and select one that suits you well. There are swing trading strategies, trend-following methods, and scaling strategies.
- Step 2. Backtest strategy — Test your newly outlined strategy on historical data to ensure it would perform well.
- Step 3. Forward testing — After defining whether the strategy is profitable on historical data, it is time to trade on a demo account. This will show if the strategy is profitable in live market scenarios.
- Step 4. Strict risk management — Although part of backtesting and forward testing, risk management deserves a dedicated mention. Ensure to always use stop-loss orders to limit losses and ensure you won’t breach risk limit rules.
Without a well-thought-out trading strategy that has been tested on both historical and live market price data, it is impossible to become funded or win trading competitions. The trading strategy is one single weapon in the hands of a financial trader that can allow its wielder to become profitable and aim for long-term success.
Trading psychology in prop trading
After developing a viable strategy and ensuring it works by backtesting and demo testing, traders can sign up for the challenge or competition and start trading for funded accounts. However, there is one more crucial detail that can not be left unaddressed. Trading psychology is the main barrier for many traders which makes it emotionally difficult and stressful to start trading and be consistent. There is hardly anyone who can still continue trading normally after three consecutive losing trades, which can easily happen in financial trading. This is why it is essential to adopt a trader’s mindset and think of trading as a game of probabilities and not certainties. When you have a certain win rate you can not define the exact outcome of the next trading before you open it. Traders need to stick to their trading strategy rules and execute trading strategy rules flawlessly. This is the only way to stay profitable and continue without emotional issues even after several losing trades in a row. Emotional and impulsive trading is the main pitfall of many traders and it requires discipline to avoid.
Some firms also offer free challenges and free trials. To understand how to win the free trading challenge, traders first need to understand their trading personality and psychology. Then it becomes much easier to select a strategy and follow its rules strictly. Swing traders will have a difficult time using scalping methods which require fast and accurate execution of trading positions. With a proper mindset and strict discipline, it is possible to pass the evaluation challenges and even win prop trading competitions.
