What Can You NOT Do When Trading With A Prop Firm? - TradingFunds (2024)

There are many advantages of using a proprietary firm when trading on the foreign exchange (Forex) market, but if you want to benefit from these, it is important to adhere to the rules first.

What is Forex trading?

Prop firms are great for those just starting out, as well as traders who are more experienced and simply want to increase the funds they can trade with.

To fully understand how to start using a prop firm, it is important to get to grips with what Forex trading is.

It is the act of buying and selling currencies with the hope of making a profit. For instance, traders pair the currencies, such as EUR/USD, and trade the Euro against the US dollar or vice versa.

It is affected by other trades, the country’s economy, and wider geopolitical news, with the trader trying to judge the subsequent changing value of each currency.

Transactions take place all the time, as the market is open all around the world, 24 hours a day. Therefore, traders can work when they want, wherever they want, making it very tempting to start investing in the market.

What Can You NOT Do When Trading With A Prop Firm? - TradingFunds (1)

Why is it good to use a prop firm?

The reason why so many Forex traders, whether they are just beginning their new career path or have been going for a while, choose to use a prop firm is because they can access more capital by doing so.

Prop firms can provide tens, or even hundreds, of thousands of dollars, in a trading fund, which means people will be able to take larger positions and earn a much higher profit. They will be able to make gains that would, otherwise, be unachievable if they only use their own money.

At the same time, as they are not trading with their own assets, they do not incur any losses should the trade not go to plan.

Saying this, prop firms have strict risk management procedures in place to avoid losing lots of money. This enables traders to focus their attention on trading rather than implementing risk management strategies, as they know the prop firm has it in order.

Another reason for using a prop firm is to learn new strategies and insights. Some provide training for traders during the evaluation process, or there is often the opportunity to chat with other traders to share their ideas and experiences. There is also sometimes a team of experts who can offer advice and support.

By learning from other people’s wins and mistakes, Forex traders will be able to improve their own skills and strategies, helping them gain higher profits and boost their reputation.

It is also worth joining a prop trading firm to take advantage of the advanced technology it provides, including analytical tools, algorithms, charting software, and trading platforms.

This helps traders determine the best course of action, based on the data analysis, and the most up-to-date market trends. Therefore, they can trade more quickly, while taking on less risk.

Rules of using a prop firm

As there are so many benefits of using a prop firm, it is only right they come with some rules, so that Forex traders do not take advantage of the huge amount of capital they now have access to.

Stop loss

For a start, traders have to place a stop loss on all their trades within 60 seconds of making one. This automatically sells an existing shareholding if the price falls below a price you set.

It is intended to reduce the amount of loss you incur should the price unexpectedly fall, as it enables you to exit before losing too much money.

The exception to this is for those who buy a ‘no stop loss’ add-on, meaning they can risk any amount per trade. However, they need to be aware that prices could fall below a level they are comfortable with and they could end up making a substantial loss.

What Can You NOT Do When Trading With A Prop Firm? - TradingFunds (2)

Scalping

All trading styles are typically accepted by prop firms, which means traders can use long-term strategies or they can adopt a fast-paced style, otherwise known as scalping.

This involves them holding currencies just for a very short amount of time before they sell, making a small profit in the meantime. Although their gains are only very little, as they make so many during the time, they quickly add up, making this style of trading very profitable and, subsequently, very popular.

Prop firms generally allow scalping, but request that trades are open for at least 30 seconds. If a trader is seen to open and close trades quicker than this on several occasions, they might be penalised in the form of having their account terminated.

Monthly trade

While some Forex traders make a living out of buying and selling currencies, many do it while still holding down a job and trying to be present in their family life. That is why it can be several days or weeks between them making trades.

Alternatively, they might prefer a long-term strategy when it comes to trading, buying and holding on to a shareholding for a considerable amount of time to try and gain as much profit as possible.

While all strategies are accepted by the majority of prop firms, they generally ask that traders make at least one trade every month. This does not mean they have to trade on each of their accounts, so they can leave some for longer, as long as they are acting on another fund.

Failure to trade every 30 days could see their account terminated by the prop firm.

Use of an Expert Advisor (EA) or robot

These days, artificial intelligence (AI) is becoming more prevalent in all aspects of life, including trading.

Those who want extra help with their trades could use an expert advisor (EA) or robot, which automatically provides trading strategies based on analysis of market data.

The software programs are able to identify opportunities based on market trends and predetermined patterns.

Traders can use these not only for guidance, but to open, monitor and close trades on their own. Therefore, they can entrust all the actions of their trading on their EA or robot without having to intervene themselves.

Whether these are allowed is down to each prop firm, as they may allow some EAs or robots and not others.

For instance, they might not accept EAs that are used for tick scalping, which is the art of conducting lots of trades in a very short period, or reverse arbitrage trading, which involves combining a short position and a long futures position in the same asset.

Copying trades from prop firm accounts

Traders who have funds outside of their prop firm’s might be able to replicate their trades. However, there may be restrictions when it comes to copying them from their prop firm accounts.

Additionally, there could be rules not allowing them to copy trades to multiple accounts. Therefore, it is important to look into the terms and conditions carefully to see what the restrictions are.

Not sharing passwords

Prop firms do not allow their Forex traders to share their passwords. As the process to being accepted for funding is personal to the skills and credentials of the applicant, they cannot risk letting someone else take control of the account.

What Can You NOT Do When Trading With A Prop Firm? - TradingFunds (2024)

FAQs

What are the downsides of prop trading? ›

- Traders in prop firms often have limited control over the firm's capital. They may need to deposit their own money as collateral or risk management. - Additionally, payouts are subject to the firm's rules, which may restrict a trader's access to profits.

How do prop firms not lose money? ›

Strict risk management rules – prop firms impose strict risk management guidelines to protect their capital. While these rules help financial companies preserve their assets, they can sometimes limit a trader's flexibility in executing trades.

What are prop firm challenges? ›

The Journey Through Prop Firm Challenges

A prop firm challenge is a structured evaluation process where aspiring funded traders demonstrate their capability to navigate the forex market successfully.

Why is prop trading illegal? ›

The Volcker Rule is one of the more controversial pieces of legislation to emerge from the financial crisis. Attached to the Dodd-Frank Act, the rule was intended to limit banks' ability to make speculative investments that do not benefit their customers.

Can you lose money with a funded trading account? ›

On a funded account, losing a large amount of money does not mean much. Even if it results in losing your funded account, you can still try to pass the evaluation at the same firm again or just join another one. Ultimately, you do not risk much and do not lose much.

Why do people fail prop firms? ›

Lack of proper risk discipline

Risk discipline is crucial regardless of your style of trading. But it is especially important in prop trading as prop firms' strict rules make it too easy to blow your funded account. While some prop firms demand their traders to use mandatory stop-losses, not all do.

Is it good to trade with prop firms? ›

Greater Profit Potential

Another advantage of prop trading lies in the potential for substantial payouts. Traders have the opportunity to leverage their profits, which means that successful trades can result in significant gains. The absence of hidden or recurring monthly fees can also lead to higher net profits.

How to pass funding challenges? ›

You need to have a solid understanding of how to manage risk in order to succeed. This involves setting stop losses, using leverage appropriately, and having a solid understanding of market trends. Keep in mind that the goal is not to make a quick profit, but to sustainably grow your account over time.

What are prop trading strategies? ›

In the realm of prop trading, there exists an assortment of key strategies that traders employ. These methodologies are diverse and include index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, technical analysis, and global macro trading.

How hard is it to pass prop firm? ›

With the Prop Firm challenges, it's not just about failing or winning. You must be profitable and fulfill certain trading objectives which makes it even harder. Less than 1% of traders who attempt the challenge pass and get funded.

What happens if you pass the prop firm challenge? ›

Upon successfully passing a Prop Firm Challenge, traders may be required to fund their trading accounts with an initial amount. The firm may also have scaling plans that determine how much capital traders can access based on their performance. Understanding these conditions is vital for your success in the challenge.

Do prop firms allow hedging? ›

Proprietary trading firms often engage in forex trading as part of their overall trading activities. Hedging strategies can also be employed by proprietary trading firms to manage risk and protect their capital. By hedging their positions, these firms can reduce potential losses and maintain more stable profitability.

What is the consistency rule in prop trading? ›

Consistency Rule Explained

By keeping your most profitable day below 45% of your total profits, you can better balance your RRR (risk-reward ratio) and develop a more sustainable trading strategy. This rule also helps FunderPro find the best pro traders to fund.

Is trading for a prop firm worth it? ›

There are many unique advantages that make working with a prop firm worth it. These include access to unique software and information, trading with the firm's capital, and cashing in a large portion of your winnings.

Is prop trading safe? ›

Prop trading involves inherent risks like any trading, yet the firm often bears the bulk of it by risking its capital, though traders risk losing subscription or joining fees and not passing the firm's trading challenge.

Can you make a living with prop trading? ›

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity. It's arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you'll earn some percentage of it.

Is prop trading stressful? ›

One of the biggest challenges some prop traders face is excessive anxiety. I know anxiety in trading is natural, but too much of it can ruin prop trading success. As a prop trader, you want to make sure you regulate your stress and anxiety level and stay emotionally healthy as much as you can.

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