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Prop trading provides traders with more profitable opportunities as compared to traditional trading. Forex proprietary or forex prop firms also gain more popularity among traders looking for capital to trade without risking their own funds. These firms provide traders with an amount of capital and traders do not face any personal financial risks. But success in trading is sometimes challenging because traders have to maintain the firm’s specific rules. Prop trading is all about the discipline that traders must have to maintain. To maintain discipline and ensure profitability, prop firms impose strict rules that traders must follow. If you are a trader and are thinking of joining prop trading then it is important to have a complete understanding of how you need to maintain discipline and what are rules that you must have to follow.
Maximum Daily Drawdown
One of the most fundamental rules in a prop firm is the maximum daily drawdown limit. This rule restricts the amount of money a trader can lose in a single trading day. The limit is usually set as a percentage of the account balance like 5% of the account size. For example, if a trader has a $100,000 funded account and the maximum daily drawdown is set at 5% then the trader cannot lose more than $5,000 in one day. If this threshold is breached then the account can be closed or suspended by the firm.
Overall Drawdown Limit
Similar to the daily drawdown, the overall drawdown limit defines the maximum loss a trader can take on the account before losing funding. This limit is often 10% of the total account balance. For example, for a $100,000 account with a 10% drawdown limit, the trader cannot lose more than $10,000 overall. If the account balance falls to $90,000 then the firm can revoke the funding.
Profit Targets
To qualify for a funded account or advance to a higher funding tier, traders mostly need to meet profit targets. These targets are typically set between 5% and 10% of the account balance within a given period. Like if a firm requires an 8% profit target on a $50,000 account then the trader must generate a profit of $4,000 before being eligible for a payout or the next funding level.
Leverage Restrictions
Most prop firms have leverage restrictions to manage risk. Some forex prop firms provide high leverage and many limit it to 1:10 or 1:30 to prevent excessive risk-taking. A trader with a $100,000 account and 1:10 leverage can control positions worth up to $1,000,000. If the firm limits leverage to 1:30 then the maximum position size increases to $3,000,000.
Prohibited Trading Strategies
Different prop firms allow different trading strategies to control risk. These strategies include:
- Martingale’s strategy doubles the trade size after a loss.
- Hedging is holding simultaneous buy and sell positions on the same instrument.
- High-frequency trading to execute a large number of trades within seconds.
- News trading is entering trades just before high-impact news releases.
Minimum Trading Days
Many prop firms require traders to be active for a minimum number of trading days before withdrawing profits or passing 2 step evaluation phases. This prevents traders from making a few lucky trades and cashing out immediately. If a firm requires 10 minimum trading days then the trader must execute at least one trade per day for ten days before qualifying for withdrawal.
Lot Size and Risk Management Rules
Most of the prop firms set lot size limits based on the account balance that helps them protect traders from reckless trading. Traders must follow risk management principles like limiting position size to 1% or 2% of the account per trade. A trader with a $100,000 account can be restricted to trading a maximum of 5 lots per position to avoid excessive risk.
Consistency Rule
The consistency rule ensures that traders do not make a majority of their profits from a single trade. Firms apply this rule to check whether a trader can generate profits consistently over time. If a trader makes 80% of their profits from one trade then they can be disqualified for failing to show consistent trading performance.
Weekend and Overnight Holding Restrictions
Some prop firms prohibit holding trades over the weekend or overnight due to increased volatility and potential gap risks. If a trader opens a position on Friday then they must close it before the market closes to comply with this rule.
Payout Structure and Withdrawal Rules
Prop firms have specific payout structures that show how and when traders can withdraw profits. Most firms provide monthly or bi-weekly withdrawals with profit splits typically ranging from 50/50 to 90/10 in favor of the trader. A trader generating a $10,000 profit with a 70/30 split will receive $7,000 while the firm retains $3,000.
