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In short, modern proprietary trading firms (called“prop firms” for short) give capital to any trader who can prove they are profitable. Traders do not need a minimum number of years of experience, specific qualifications or to be in a certain location when trading. People applying to prop firms come from all backgrounds, ages, and parts of the world. Modern prop firms have helped thousands of traders make enough money to turn trading from a hobby into a profession.
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However, before giving out capital to traders, prop firms use an evaluation period called a“challenge.” Let's look at how these challenges work, the different types, and how best to pass them is a Prop Firm Challenge and How Does it Work?
Before a prop firm gives capital to traders, it must know whether they can trade profitably. To identify profitable traders, they use an evaluation process called a“challenge,” where applicants trade a monitored demo account. If the participants meet specified profit targets on the demo account, the prop firm will give them an account with a balance to trade, and the prop firm will pay the trader a percentage of the trading profits on the new account Three Phases of the Prop Firm Challenge Process
Initial challenge: The initial part of the challenge requires traders to grow the account by a minimum percentage with limits for drawdowns. The exact profit targets and rules will vary between prop firms .
Additional verification: Once a trader passes the initial challenge, many prop firms have a further verification challenge. Some prop firms will have the same profit targets for the additional verification stage, and others will have a lower profit target. Some prop firms may set several additional verification challenges. These extra challenges reduce the chance that a trader passed the initial challenge through luck, especially if they took multiple attempts at the initial challenge.
Account, balance and payout: Once the trader has passed the initial challenge and additional verification steps, the prop firm gives them an account with a balance to trade, and the prop firm will pay a percentage of the profits to the trader are the Typical Requirements to Pass a Prop Firm Challenge?
While each prop firm will have its own rules for their challenges, they share many commonalities:
Growing the Account by a Minimum Percentage
To pass the challenge, the trader must grow the prop firm's demo account by a minimum percentage of the initial balance. This goal is how the prop firm will know that a trader is profitable. The percentage targets I've seen in the prop firm industry range from 6% to 10%.
Maximum Daily Loss
The trader must restart the challenge if they lose more than a predetermined amount in a single day. For example, if a prop firm sets the maximum daily loss at 5% of the initial account balance and the trader starts with a $50,000 demo account, the challenge would stop if the account lost more than $2500 in a single day. Prop firms usually count open and closed positions towards the maximum daily loss.
Maximum Drawdown
The prop firm will stop the challenge if the account value dips below a certain dollar balance. Prop firms include the value of open and closed trades in this calculation (similar to the maximum daily loss). For example, a prop firm may set the maximum daily loss on a $50,000 demo account at $5000, i.e., 10% of the account balance. In this case, the challenge would stop if the account balance (including open trades) reached $45,000 or less.
Minimum Number of Trading Days
Let's say the prop firm sets a minimum of four trading days to complete the challenge. That means the trader must open trades on four separate trading days as a condition of passing the challenge. Even if they grow the account by the minimum percentage but only open trades in two separate trading days, they still have not passed the challenge. Prop firms have this rule to help ensure a trader does not get lucky in one or two days.
Maximum Number of Days
Fewer prop firms have this rule, but if they do, a trader must meet the profit target within a certain number of days.
Remember, the above is simply a guide. Each prop firm will have rules that may or may not be similar to the above. Check the rules for the prop firm that interests you Types of Prop Trading Challenges
Simulated Trading Challenges:
This is the most common type of prop firm challenge, in which the participant trades a demo account. There is no financial risk for the prop firm or the trader (apart from their challenge fee).
Tiered Challenges:
Many prop firms have structures, which require multiple verifications before traders access an account that pays out profits. Some prop firms allow traders to choose between one or multiple challenges with different profit targets.
Forex vs. Futures . Some prop firms have separate challenges for spot Forex traders versus Futures traders.
Salaried positions. I know of at least one prop firm now offering salaried positions when traders meet specific profit targets. I hope more prop firms adopt this option.
Are Most Prop Firm Challenges Realistic
I believe most prop firm challenges from reputable and long-standing prop firms are realistic. Prop firms design challenges to ensure sustainable profitability where the trader controls risk and drawdown. This should be the aim of any trader, whether they trade a personal or a prop firm account.
For many traders, the prop firm rules, especially the risk controls, improve their trading. That's because they know they will have to start all over again if they draw the account down past a certain point, so they only take the best trades that meet their trading strategy rules. In other words, their discipline improves.
Occasionally, prop firms have different trading rules once a person passes a challenge. For example, during the challenge, the prop firm may allow positions held over the weekend but not with the account that pays out profits. Ensure the rules are the same before and after a challenge. If the rules differ, ask yourself if you would be comfortable trading under the new rules, after having passed the challenge.
I have encountered some small prop firms whose demo accounts have terrible execution, making it impossible to pass the challenge. I suspect those prop firms are only interested in collecting registration fees and never having traders with profit-sharing accounts. Read the prop firm reviews to determine if a prop firm is doing this!Free vs. Paid Prop Firm Challenges - Key Differences
Some prop firms charge a fee to take a challenge, while others offer the challenge for free. Let's take a quick look at the key differences:
The more reputable and long-standing prop firms charge a fee. Prop firms that charge a fee usually refund the fee when the trader successfully passes the challenge. Many prop firms allow traders to retake the challenge multiple times without paying the fee again. I'll lose the fee if I never pass the challenge-this is my primary financial risk when taking a challenge. Not many prop firms have free challenges and those that do generally allocate smaller accounts to traders that pass.
Tips for Passing a Prop Firm Trading Challenge
Read the prop firms rules thoroughly. For example, know the leverage ratio and the maximum drawdowns they allow during the challenge. Plan your trades around those rules.
Practice in a demo or live account before the challenge with the strategy you plan to use during the challenge. Ensure you can pass the challenge before taking it.
Aim for steady trades to build up the account to the profit goal, especially if the prop firm has no time limit to reach it. Do not go for trades that do not meet your strategy rules to try to rush the process.
Use a journal to record the reasons for entering and exiting positions and your emotions during trading. All these notes help keep track of your progress and discipline to Choose the Right Prop Firm Challenge
Rules: Read the challenge rules to ensure they suit your trading style and check to see if the rules change after passing the challenge.
Smart small: Start with a smaller challenge, often with a smaller fee. For example, start with a $50,000 rather than a $200,000 account challenge. You can always go for the larger account challenges later.
Prop firm reputation: Read the reviews of prop firms to spot patterns of negative feedback, such as not issuing refunds or payouts.
Support and resources: Many prop firms offer fantastic support to participants before and after they pass a challenge. These include trade mentoring and networking with other successful traders. Look to see if a prop firm has the type of support that can help you.
Payout structure: Determine whether the payout structure would fit your needs. For example, some prop firms only allow payouts at certain times of the month Firm Challenges-Pros and Cons for TradersPros
Prop firms can fast-track traders to a larger account size.
Today, prop firms offer healthy payouts of 80-90% of profits.
The rules can improve traders, for example, by ensuring they meet drawdown limits.
Most prop firms refund the challenge fee when a participant passes and allow participants to retake challenges without repaying the fee.
Prop firms offer a lot of support, such as mentoring and networking with other successful traders
The fee is a financial risk if a trader cannot pass the challenge.
Some prop firms have different trading rules after the challenge, such as not allowing weekend trades.
The prop firm industry is lightly regulated, and it's up to participants to research a firm's reputation for honesty Take
Prop firms have come a long way in the last few years. They now offer much healthier payouts, support, and more relaxed trading rules, such as allowing overnight trades. There are so many great choices that any trader wanting to take a prop firm challenge should be able to find one that fits their needs. Each prop firm will have its rules for challenges, but most will require participants to grow the account size by a certain percentage while keeping daily and overall drawdowns within certain limits. It's still essential that participants do their research because not all prop firms will meet their needs.
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