Getting funding from a prop-firm so you can pursue trading on the forex market is the goal for many budding traders, as it enables them to become active without risking their own cash.
However, being accepted for funding can be a little like a ‘chicken and egg’ scenario, as the applicants need to prove their experience in the field, even though they are unlikely to have the capital to gain this experience on their own.
In order for them to achieve as much success in the forex markets, they will need significant trading funds, but this is also why they approach prop firms, as these can provide them with the finance – and therefore, the opportunity – to trade.
So, what is the secret to help upcoming traders secure funding from prop firms?
Pass the trading evaluation challenge
Before a prop firm is going to part with up to $200,000 (£160,408), it needs to be assured the trader has the knowledge and skills to make a profit with this money.
It will not give tens of thousands of dollars to someone who has no experience, risk management skills, or evidence of effective strategies.
That is why prop firms make applicants take part in a trading evaluation challenge, which allows them to demonstrate their skills before they are given real cash to use.
These challenges vary from prop firm to prop firm, but they typically involve trading on a demo account or a simulated trading platform with fake funding.
Prospective traders have to adhere to the same rules, terms and conditions as a live trading account, using this opportunity to prove they have what it takes to make a good return on the prop firm’s investment.
This allows them to show their workable, and profitable, trading strategies, providing evidence they know their way around the market.
What do prospective traders need to demonstrate?
During the challenge, potential traders do not just have to make a profit, but they must demonstrate they have the right skills to be a successful forex funded trader.
– Risk management
For instance, they need to show they can manage risk effectively to maintain their finances.
They need to stick to the prop firm’s strict risk management guidelines, which will give the company confidence the trader will not play it fast and loose with their money.
They therefore need to avoid exceeding the maximum daily loss; implement the risk management principles they already know; and never violate the firm’s trading rules.
Before even applying for the trading evaluation challenge, it is important to do a lot of research into the terms and conditions of the program.
To achieve the most success, traders need to make sure they know, and understand, every detail of it. They should be aware of what they are expecting and what they have to do to pass.
This means learning what the firm’s specific trading rules are, including their trading hours and allowable instruments.
They also need to fully grasp what their evaluation objectives are, such as their profit target, their maximum drawdown, if there is a daily drawdown or not, and how many trading days there will be during the challenge.
Some prop firms set a period of time for the trader, while others evaluate the trading performance over weeks or even months to conduct an in-depth analysis of their performance.
Doing this research demonstrates both the trader’s commitment to the program, but also their ability to be thorough and conscientious.
Although traders do need some level of impulsivity in order to make the big wins, this needs to be balanced with consideration, analysis and strategy.
– Strategies to pass the trading evaluation challenge
One of the biggest things prop firms are looking for are what strategies prospective traders use during the evaluation challenge.
Having a strategy of any sort is a must, as applicants will not receive any assistance from the prop firm so are reliant on their own skills and expertise.
Having a strategy gives them a basis upon which to start their trading and provides them with guidance on how to tackle market changes.
Here are some strategies they could try:
– Identifying market trends
This is sometimes known as ‘trend following’, as it is based on understanding market trends.
Traders can then determine what makes the market fluctuate, so they can judge when to make trades, going in the direction of the trend.
Following the direction of the market’s movement is a safe strategy, particularly in markets that have clear trends. This is because these can be analysed using trading algorithms, helping traders know exactly the point they should act.
However, more volatile markets can reverse direction quickly, making it harder to anticipate when to trade or sell.
With trend following, it is important to know the market well, and pay attention to the global economics and the trading patterns. Once traders have determined what the chart looks like, this provides a higher certainty of the direction of the trend.
Therefore, it reduces the risk of trading at this point.
– Swing trading
Something else worth deciding is whether to will partake in swing trading. This is when traders hold on to a financial asset for a lengthy period of time, such as weeks or months.
It is so called, as it means the trader tends to act when the market swings in the other direction.
This strategy is popular as it enables traders to profit from medium-term price movements.
Traders use technical analysis to ascertain the trend in the market, while also looking at the bigger global economic picture to estimate whether other factors could have an impact on movement.
They then aim to capitalise on the momentum in the market, instead of acting quickly.
This could reduce the risk, as trading is based heavily on pattern analysis. However, it could also lower profit, as holding on to an asset for a long time may mean traders see declines in value they had not anticipated.
– Day trading
Alternatively, traders might adopt the strategy of day, or scalping, trading.
This involves trading several times a day, instead of sitting on assets for a while. Trading in this style allows people to take advantage of subtle price movements throughout the day.
By buying and selling very quickly, they are able to make small wins that will add up over time.
It also avoids the risk of price declines, as traders act very quickly. Therefore, traders typically have a higher win rate.
In order to be successful at this strategy, it is important to use risk management techniques to limit losses, including tight stop-loss orders.
– Breakout strategy
Another strategy is breakout trading, which is when traders look for a potential shift in the market.
They use charts to determine when the price is about to break through a resistance level, and then act in the direction of the breakout.
This allows them to benefit from sudden price movements by holding on to their asset until it reaches a predetermined profit target or changes direction again.
It means traders need to be able to identify resistance levels and understand price pattern formations, so they know when to buy or sell.
The advantage of this is being able to capitalise on sharp price fluctuations. However, traders need to be aware that false breakouts can occur, which makes this strategy high risk.
Therefore, they need to employ stop-loss orders and other risk management strategies to reduce their losses.
– News trading
Traders could also base their decisions on world news events. Global economics has such a huge impact on international markets, so they need to be aware of upcoming announcements.
Potential traders have to study how global economics, statistics and reports impact the financial market. This includes interest rates, gross domestic product (GDP), unemployment rate, retail sales reports, and consumer price index.
It is sensible for traders to use an economic calendar to track these, so they can see how the market responds to each situation.
They will then buy or sell, anticipating how other traders will react to the news. This is a popular strategy for day traders, as they typically close their trade once the market has adjusted to the update, which can be just a few minutes or hours.
Prospective traders need to be careful with this strategy as the market might not react to the news events the way they think they will, making it a high risk technique.
Therefore, they need to have strict risk management skills, so they reduce their chances of substantial losses.
Outcome of the evaluation
After the prop firm has determined it has seen enough evidence of the trader’s performance, it will decide whether to accept them or not.
This decision will be based on whether the prospective trader has met their performance criteria, adhered properly to their terms and conditions, and shared their profits.
If the trader is successful, they will then be able to become funded traders, being given a significant amount of money to trade in the foreign exchange markets. They will also have the freedom to employ the strategies that made their application successful, achieving real wins for both themselves and the prop firm.