Proprietary trading, commonly known as ‘prop’ trading, can be a powerful model. Instead of trading with their personal money, traders get access to a financial firm’s capital, enabling more opportunities and larger position sizes. For successful traders, prop trading can dramatically enhance their profit potential.
However, prop firms are selective about which traders they fund. To access a prop account, traders need to pass a dedicated challenge, proving their profitability and consistency. While these challenges aren’t impossible, they’re designed to be hard, allowing the best traders to stand out from the crowd. Thankfully, smart preparation can help traders improve their odds of success.
In this article, we’ll cover the basic components of these challenges, explaining how they work in practice. We’ll also look at the three pillars that traders should focus on as they gear up for their first prop challenge: strategy, mindset, and risk management. Master these fundamentals, and you’ll be well-positioned not just to pass a prop challenge but to thrive as a fully funded trader.
Key Points:
- Prop firm challenges are designed to test a trader’s capacity to generate profits while abiding by key risk limits. Nearly all legitimate prop firms come with some sort of evaluation, typically offered as a single-step or multi-step process.
- While the details of every challenge differ, these tests typically specify a maximum daily loss and a maximum total loss. Traders are expected to grow their account size by a certain amount without violating these limits, potentially within a certain time period.
- Strategically preparing for a prop challenge can include paper trading and backtesting to validate a trading framework. When the challenge begins, traders should stick with a repeatable plan focused on high-probability setups and avoid trying to rush to meet profit targets.
- Because trade challenges immediately end if loss limits are violated, risk management is paramount to success. Effective risk management can be practiced through intelligent position sizing, diligent use of stop loss orders, and avoiding the temptation to overtrade.
- Psychological outlook can play a key role in managing the stress and anxiety that comes with a trading challenge. By understanding that losses are a normal part of the trading process, traders can stay patient when positions turn against them and better stick with their long-term trading plan.
What is a Prop Firm Challenge? Understanding the Landscape
Prop firms offer traders the opportunity to increase their profit potential. By deploying the firm’s capital, not just their personal resources, traders can scale up their position sizes and take advantage of more opportunities. To reduce risk, however, prop firms need to be selective about what traders they work with – funding unskilled traders can risk the firm’s capital and profitability.
That’s where the prop firm challenge comes in. Prospective traders sign up for these challenges to prove their skills through a standardized evaluation. Prop firms set specific profitability criteria for traders to achieve, typically with strict risk limits attached.
To ensure that traders are serious about dedicating their time to the markets, prop firms charge a fee to start a trading challenge. If a trader successfully completes the challenge, their fee is generally refunded, and they unlock the ability to trade with prop firm capital. If the trader fails, however, they sacrifice their challenge fee and will be unable to open a funded account.
What types of prop firm challenges are available?
Prop firm challenges come in many different shapes and forms. Depending on your unique trading style, you may find that a particular firm’s challenge is a better fit than another. Below, we break down the major differences between various types of trading challenges.
One-step and multi-step challenges
Traders working with a one-step challenge prop firm only need to pass a single evaluation stage before unlocking their full account. In contrast, some firms have multiple steps, requiring that traders demonstrate consistency by achieving profitability goals across several stages. It’s also possible for firms to offer both, allowing traders to choose the option that best suits them.
For traders with the choice between one-step and multi-step challenges, the main factor to consider is how the terms of the challenge align with their trading style. One-step challenges may have more aggressive targets, potentially requiring traders to generate more profits to succeed. In contrast, multi-step challenges can be a better fit for traders with a more consistent, steady style.
Scaling plans
At some firms, trading challenges are the only way to earn larger account sizes. When traders pass an initial challenge, they unlock a funded account of a specific size. If they want to increase their capital limits in the future, they may have to pass an entirely new challenge.
Other firms operate with scaling plans, where traders can unlock larger accounts by achieving key milestones over time. This allows traders to progressively increase their accounts by demonstrating continued profitability, without needing to continually undertake fresh challenges. Some traders prefer the convenience of a scaling plan, while others prefer the focus of a specific challenge period.
No-challenge prop firms
In recent years, some prop firms have been embracing a relatively new approach: abandoning the challenge phase entirely. At these firms, traders may be able to unlock funded accounts immediately by paying a fee, without needing to pass an initial evaluation. Although this may sound appealing, no-challenge firms (also known as ‘instant access’ prop funding) can come with significant drawbacks.
Typically, fees for these firms are far higher than those paid for challenges. Moreover, no-challenge prop firms often have stricter risk limits when it comes to retaining a funded account. Due to their expense and lack of flexibility, no-challenge prop firms aren’t always the best fit for many traders, despite their intuitive appeal.
Prop Firm Challenge Example: How They Work in Practice
To better understand how a prop firm challenge works in practice, an example can help clarify some of the key variables and terms that traders may encounter. In the following section, we detail the terms associated with OneFunded’s trading challenge. Remember that each prop firm sets specific criteria for their trading evaluation, and that traders should ensure they fully understand the terms before paying their challenge fee.
OneFunded’s challenge: Targets, risk limits, and more
OneFunded’s trading challenge features no time limit, meaning that traders can take as much time as they need to hit profitability targets. What’s more, there are a variety of account sizes for traders utilizing different strategies. The key terms of the challenge are listed below:
- Stages: To offer traders flexibility, OneFunded’s challenge features both one-stage and two-stage trading evaluations. To keep things simple, the rest of this section will detail terms for the two-stage challenge. Traders need to achieve distinct profit targets in each stage to demonstrate consistent and reliable trading success.
- Challenge Fee: In order to launch the challenge, traders need to pay a fee, which helps support platform upkeep and ensure that only serious traders are considered for funded accounts. The fee varies, but is generally between 5-10% of the account size a trader seeks to unlock for the two-stage challenge. This fee is 100% refundable if the trader passes the challenge.
- Profit Target: For the first stage, traders need to achieve a profit target of 8%. Once this is achieved, a trader can move on to the second stage, which has a profit target of 5%. There is no time limit associated with achieving the profit target in either stage.
- Minimum Trading Days: Although the OneFunded challenge does not come with a time limit, traders do need to be active for a minimum number of days. For both stages, traders need to place a trade on at least three separate days. This helps ensure that profitability targets aren’t achieved simply by one big, risky trade.
- Risk Limits: This challenge comes with two separate risk limits: a maximum daily loss and a maximum overall loss. Traders can’t lose more than 5% of their account value in a single day or more than 10% of their account value throughout the entire challenge period. Violating either of these limits leads to an immediate failure.
- Account Sizes: Traders should carefully consider the account size they’d like to use for a prop firm challenge. Larger account sizes tend to be more costly, but can also unlock greater profit potential in the future. OneFunded’s challenge features account sizes ranging from $2,000 to $100,000.
Once a trader has passed a prop challenge, they’re on their way to unlocking a funded account and trading with the firm’s capital. Remember to carefully consider the profit split associated with a prop firm. Spending time and energy passing a challenge for a prop firm with a meager profit split may not be worth it – OneFunded features a competitive profit split up to 90% for successful traders.
While the terms listed above are accurate as of the publication of this article, they could be subject to change in the future. Nonetheless, this example offers practical insight as to how trading challenges work in the real world. When it comes to picking the right challenge, understanding terms like this is crucial.
Picking the right prop firm challenge: Key factors
Given the diverse array of prop firm challenges available to traders, picking the right one can be difficult. To find the best fit for your trading style, several key factors to consider include:
- Expense vs. value proposition. Some traders are purely focused on finding the cheapest prop firm challenge. But picking the challenge with the lowest fee may not always be the best fit. Not only are these fees generally refundable for successful traders, but platforms with higher fees can sometimes also offer higher profit splits on funded accounts.
- Understand the terms. Before embarking on a trading challenge, it’s essential to understand the terms associated with the evaluation. That doesn’t just mean confirming elements like profit targets, risk limits, and time period. It also means reading the fine print to understand factors like allowable strategies and position sizing limits.
- Account sizes. Challenge terms and fees usually differ by account size. It’s important that traders pick a firm with appropriate account sizes for their trading strategy, especially those that may need more capital to effectively execute their approach. Picking the right account size upfront can avoid needing to pass a new challenge in the future.
Once a trader has identified, selected, and understood the prop firm challenge they want to undertake, their focus must shift to successfully completing the evaluation. Prop firm challenges typically aren’t easy, since they’re designed to eliminate unprofitable traders. With a diligent framework and approach, however, traders can give themselves the best chance of success.
Passing a Prop Firm Challenge: Strategies and Framework
In a narrow sense, passing a prop firm challenge is simply about executing profitable trades to achieve specific targets. Consistent profitability, however, requires a broader strategy and framework. In this section, we’ll look at how traders can maximize their possibility of passing a prop firm challenge through preparation and execution, followed by continuing success on the prop firm’s platform.
The importance of pre-challenge preparation
It can be tempting to dive straight into a trading challenge. After all, the sooner you pass the evaluation, the sooner you unlock a funded account. Pre-challenge preparation, however, can dramatically increase your odds of success:
- Start with paper trading. Beginning with a ‘paper account’ can help validate your trading approach before putting real money on the line. Many traders start with a paper account before graduating to deploying their own personal capital. Once you’ve demonstrated consistent profitability with each approach, you’ll be better prepared for the higher stakes of a trading challenge.
- Backtesting strategies with historical data. While testing your strategies with real-world capital is clearly valuable, you can develop even more trading confidence by backtesting your approach. Robust backtesting can be an advanced process, requiring access to historical data and strong programming skills. However, seeing your strategy’s performance in past market environments can provide greater insight into enhancing long-term profitability.
- Selecting the right challenge. As you prepare to undertake a trading challenge, perform careful research to find the right prop firm for your trading strategy. Some traders tend to generate small, consistent profits – others focus on rarer opportunities with higher potential payoffs. Since challenges vary based on risk limits and profit targets, picking the right one can increase your odds of success.
Practical tips to successfully complete a prop challenge
Once you’ve completed your preparation, it’s time to start the trading challenge itself. Undertaking a new prop firm challenge can be a nerve-wracking experience. Incorporating a few of the practical tips below can help alleviate that stress and improve your chances of unlocking a funded account.
Tip #1: Treat it like a marathon, not a sprint
Time limits for a trading challenge can frequently be a month or longer, with some firms having no limit at all. That’s a clear indication that trading challenges should be treated like a marathon, not a sprint. Focus on gradually accumulating the necessary profits through intelligent trading, not trying to finish the challenge as quickly as possible with a few big wins.
Tip #2: Favor high-probability setups
When it comes to passing a trading challenge, it can make sense to ignore certain opportunities, even if they seem like a good trade. Some trading set-ups can offer high potential profits but with a low chance of success. While you may want to capitalize on those opportunities once you’ve unlocked a funded account, chasing low-probability home runs can easily lead to a failed trading challenge. Instead, prioritize steady, consistent gains backed by high-probability setups.
Tip #3: Build a repeatable plan
In line with the theme of marathon consistency, trading challenges are often far easier with a structured, repeatable plan. A trading challenge is not a time to be improvising or learning on the fly. At a minimum, a comprehensive trading plan for a prop firm challenge should include:
- Target profit per day and per trade.
- Entry conditions, such as key technical patterns or indicator signals.
- Stop loss placement to liquidate positions that turn against you.
- Take-profit rules that define when to realize position gains.
- Assets and markets to trade.
- Maximum number of trades per day to avoid overtrading.
It can also be helpful to keep a dedicated trading journal during the challenge. This can help ensure that you stick to your pre-defined plan while also allowing you to reflect on future adjustments that need to be made.
Tip #4: Trade during the right hours
If you’re taking a trading challenge seriously, it might seem like spending endless time in front of the computer is the right approach. In fact, prioritizing just a few key hours might be even better. In many markets, the most attractive opportunities can be contained in a relatively short window (such as the New York-London overlap in forex).
What’s more, overanalysis can lead to both data mining and trading on suboptimal opportunities. When you’re passing a challenge, focusing solely on the most attractive setups and hours can be more effective, even though it takes less time. Once you’ve passed the trading challenge, you can scale this commitment up or down as you see fit.
Continuing your prop trading success
Passing a trading challenge can seem like a significant achievement – and in many ways, it is, reflecting the start of your prop trading journey. But when you’re trading with prop money, every day can be an evaluation. Aligning with a firm’s long-term trading goals and risk limits is key to keeping your funded account over time. Building good habits and strategies during the evaluation phase can pay dividends in the future.
Mastering Risk Management for Prop Firm Challenges
In the previous sections, we looked at practical examples of prop firm trading challenges and key strategic tips for success. Here, we’ll dive deeper into one of the most essential tools for passing a prop evaluation: risk management. When it comes to prop firm challenges, managing risk is arguably more important than chasing profits.
A string of lower-than-expected gains might mean that a trader takes longer than anticipated to pass a trading challenge. But a string of higher-than-expected losses can lead to immediate failure. For this reason, risk management should be a key focus for traders during a prop evaluation, beginning with a strong understanding of the challenge’s risk rules.
Understanding prop trading risk rules
While every prop challenge differs, most evaluations come with two main risk rules:
- Maximum account loss. The maximum account loss is the most that a trader’s account size is allowed to decrease by. For instance, suppose that a trader begins a challenge with a $100,000 account and a 10% max loss limit. If the account dips below $90,000 at any point, this limit will be violated.
- Maximum daily loss. The maximum daily loss is the most that a trader’s account can decrease by in a single day. Using the previous example, imagine that the challenge also comes with a 5% maximum daily loss. If the trader starts a day at $110,000, and their account dips below $104,500 at any point, they’ll fail by violating the daily risk limit – even though they didn’t violate the total risk limit.
It’s especially important to understand these limits for traders who use leverage. Utilizing leverage can result in big swings to the equity value of a trader’s account. That can lead to unexpectedly triggering risk limits and failing a challenge.
Risk limits generally apply to both realized and unrealized losses. If a stock or currency dips sharply, it could be enough to trigger failure, even if you think the asset will recover later on.
Fundamentals of position sizing
Position sizing is an essential aspect of risk management. Even fairly low-risk trades can inadvertently blow up your portfolio if you’ve allocated too much capital to them. As a rule of thumb, traders should consider keeping the total risk on each individual position to less than 2% of their portfolio.
For example, suppose a trader has a $100,000 account and follows the 1% risk rule. This means the trader is willing to lose a maximum of $1,000 on a single trade. The actual dollar amount of the position doesn’t determine the risk — what matters is where the stop loss is placed. If the stop loss level is set so that, in case it’s hit, the trader loses $1,000 (which equals 1% of the account), then the trade fully aligns with proper position sizing principles.
At some prop firms, this position size rule is a formal part of the platform’s risk limits. Depending on the firm, this rule generally ranges from 0.5% to 2% of the account value. To be extra careful, it can be beneficial to trade even more conservatively than any formal position size rule.
Common risk management mistakes
By staying aware of a firm’s risk rules and aligning their strategy with these limits, traders can give themselves the best chance of success in a prop firm challenge. But in many cases, risk management is easier said than done. These common risk management mistakes frequently trip up traders:
- Revenge trading after losses. After a string of losses, it can be tempting to ‘revenge trade’ to try to make up with some quick wins. In reality, trading aggressively is an almost-surefire way of seeing your account value decline even more. After you’ve suffered a setback, it’s often more helpful to take a break and return when you can patiently focus on the highest potential setups.
- Increasing position size to “catch up.” After they’ve lost on a trade, some traders attempt to double down by increasing the position size of their next trade. The idea is that they’d like to “catch up” by not only generating new profits, but also recovering previous losses. This approach is similar to ‘Martingale systems’ that often end in a trader losing all their capital.
- Removing stop losses. Stop losses should be used to strictly define exit points for a position. Unfortunately, some traders get attached to a particular trade and decide to adjust or remove stop losses after the position has begun to move against them. It’s important to stick with your stop losses to avoid accumulating deeper and deeper losses.
- No risk buffer. Just because a prop firm features maximum loss limits doesn’t mean that traders should actually risk capital up to those limits. Instituting a buffer between the firm’s rules and a trader’s self-imposed rules can help add an extra layer of security before failing a challenge.
- Holding trades overnight without proper assessment. Holding positions overnight and through the weekend can introduce unique risks for traders, especially due to unexpected news releases or after-market events. While this typically isn’t a problem for traders using short-term styles, any trader holding positions after market hours should ensure they’ve conducted appropriate risk assessment.
- Ignoring correlation risk. Some traders may think that they’re sufficiently ‘diversified’ just because they hold a large number of positions. If these positions tend to move together, however, they may be less diversified than they think. Correlation risk can result in a portfolio’s account size moving quicker than expected and potentially violating total risk limits.
As you can see, many of these mistakes stem from poor decision-making following adverse trading outcomes. That hints at the importance of an appropriate mindset for successful trading. Trading psychology is an underappreciated factor that can make a significant difference in passing prop firm challenges.
The Psychological Game: The Importance of Mindset for Prop Challenges
When you sit down to create a trading plan, the process can seem highly rational: research and analysis followed by intelligent execution. But when you actually start to trade, you realize that trading also has a strong emotional component. While nothing can replace high-probability setups and sophisticated analysis, having the right psychological outlook can help avoid key mistakes that lead to challenge failure.
Handling drawdowns and losses
The most significant psychological challenge for traders is effectively dealing with drawdowns and losses. Reacting emotionally often leads to risk management errors in pursuit of higher profits to recover from past losses. These errors can include overtrading, aggressive position sizing, or deviating from self-imposed risk rules like stop loss limits.
The key lesson for traders to understand? Losses are an integral and unavoidable part of the trading process. A set-up with a win rate of 80% is almost universally considered a ‘high probability’ opportunity – yet one out of every five of those opportunities is still expected to generate losses.
A higher-than-expected drawdown can also indicate that the current market environment may not be suited for a trader’s style. If that’s the case, continuing to trade would clearly be a bad idea. Stepping back until the environment becomes favorable is often more productive.
Overall, three lessons can effectively summarize what traders need to understand about handling losses psychologically:
- Losses are normal. It’s normal – and even expected – for traders to lose money over certain periods. Since all trades involve risk, there’s no such thing as a sure-fire set-up. Yes, traders need to ensure that losses remain within key risk limits, but occasional failure is a regular and integral part of the trading process.
- Patience beats aggression. Aggressive trading is rarely the right call, especially when traders are coming off a painful series of losing trades. Moments like these call for patience, allowing traders to reset and remind themselves of their trading plan.
- Sleep on plan changes. While traders shouldn’t overreact to losses, they can still be a useful source of information when it comes to potential plan changes. Sometimes, the market environment calls for a shift in strategy. Instead of immediately implementing plan changes, however, traders should always take a step back and sleep on their decision. Waiting until the next day can help ensure that changes are made for rational reasons, not emotional ones.
Finally, traders shouldn’t ignore other aspects of their life that can impact emotional regulation, even ones that have nothing to do with trading. For example, sleep, diet, and exercise can all play a role in promoting mental clarity and emotional stability. Given the importance of psychology when it comes to passing a trading challenge, these are areas that traders can’t afford to ignore.
The paradox of caring too much
The last aspect of trading psychology worth mentioning is an intriguing paradox about a trader’s desire for success. Many traders care deeply about passing a prop challenge, generating profits, and unlocking a funded account. Surprisingly, however, this mental investment in their goal can actually be a drawback.
Traders who ‘care too much’ about achieving their goals can develop stress and anxiety when positions turn against them. That can make successful trading even harder. And this phenomenon isn’t exclusive to trading – academic research consistently finds that overinvestment in a desired goal can paradoxically harm performance due to added psychological pressure.
In fact, at Wall Street firms, it’s not uncommon for traders to treat their ongoing P&L like points on a scoreboard, rather than actual money. This mental trick can help traders alleviate stress relating to market swings that might impact their bottom line by thousands or even millions of dollars. For traders seeking to succeed at a prop firm, it’s vital to care enough to pass a prop challenge – but not so much that the goal ends up fostering harmful stress.
Conclusion: From Preparation to Action
It’s no secret that passing a prop trading evaluation can be challenging. These tests are designed to separate the profitable traders from the unprofitable ones. But through disciplined preparation, traders can give themselves the best chance of success at unlocking a funded account.
In this article, we discussed the three key pillars of preparing to successfully pass a prop firm challenge: strategy, mindset, and risk management. Without a comprehensive strategy, traders will be left improvising and guessing. Without the right mindset, traders could crack under the pressure of short-term losses. And without effective risk management, traders can easily let bad habits get in the way of achieving their long-term goals.
To unlock a funded account, incorporating all three of these pillars is key. Once you’ve completed your preparation, nothing can replace action. That means finding the right challenge, paying the associated fee, and starting your journey to become a true prop trader.
At OneFunded, our prop firm challenge is designed to help profitable traders stand out from the crowd and prove their skills. With risk limits that can accommodate different trading styles and a refundable challenge fee after passing, we enable successful traders to unlock a funded account and enhance their overall profits. To get started, navigate to our Challenge page and select the best account size for you.
