Best Approach for Passing a Prop Firm Challenge

A prop firm is any financial institution that makes large amounts of capital available to traders for their trading activities in the hopes of securing huge profits that can be split between trader and firm. There are traditional prop firms that recruit traders through normal employment methods and pay them a salary. Then, there are new-age prop firms that operate almost completely online and recruit traders through a challenge or evaluation process.

So many traders wish for a world where they magically pass a prop firm challenge of their choice and become funded. However, as most come to realize, passing a prop firm challenge is not a jolly walk in the park. The system is designed to allow only the most talented and disciplined traders into the various funded programs run by different firms.

Key Takeaways

• Passing a prop firm challenge is about discipline and risk management, not secret strategies.
• The rules of the challenge are designed to test your consistency, not just your ability to make a profit.
• You must have a simple, clear trading plan that you test thoroughly before starting. We will show you how to create a winning trading plan.
• Always know exactly what you will trade, when you will trade it, and how you will enter and exit.
• Set a personal daily loss limit that is stricter than the firm’s rule to stay safe.

Understanding Prop Firm Challenges

There are two sides to every prop firm challenge: the trader’s side and the firm’s side. Understanding both sides is key because prop firms in their entirety are designed to be a win-win for traders and firms, not just one or the other.

The Why Behind the Challenge

Prop firms bear a huge portion of the risk when making trading capital available to traders, and as any firm looking to succeed would, they have to ensure that they are investing in only the most talented traders, who will better manage their capital. They can’t just take people’s words for it or assume that previous profitability, as seen through trading journals, will guarantee future earnings. The challenge/evaluation system of onboarding traders was born from this need.

Prop firms looked at their goals, considering what is acceptable for them in terms of capital loss, profit secured, and trading consistency, and came up with unique versions of a kind of trading test or challenge that have these goals as rules.

In this test or challenge, traders are given demo accounts, provided with analytical tools and powerful platforms that the prop firms use, and required to achieve the goals set forth by the prop firm in question. These goals differ slightly between firms.

Regardless, in this challenge, there typically are profit percentages, daily and overall loss limits, and trading consistency requirements that mirror what is acceptable or obtainable on accounts with real funds.

Moreover, prop firm challenges allow traders to test their discipline level in the face of changing emotions. It also prevents them from losing their own capital on a larger scale without proven skills or strategies.

Deconstructing the Common Rules of Engagement

Prop firms have the following basic rules:

• Profit Target: This is a certain percentage of the challenge account’s initial deposit that must be made within the duration of the challenge. The highest most prop firms will require is 10% of initial capital.
  The good news is that most prop firms have a beneficial no-time-limit rule. This allows traders to take the challenge in as much time as they need to hit the required percentage profit.

• Maximum Drawdown: This is the maximum percentage of loss acceptable by the prop firm. Once this value is hit, your challenge account will be deactivated because you would have breached a major challenge rule. Depending on the type of challenge you are taking, the value could be as low as 8% or as high as 12%.

• Daily Drawdown: While there is an overall loss limit, most prop firms also impose a daily loss limit rule because you have to remember that prop firm trading is not so much about big wins and losses as it is about consistency.
  Prop firms believe that having a daily limit that must not be exceeded will incentivize traders to apply risk reasonably and only take the best trades with potential desired results.

• Minimum Trading Days: This rule also targets consistency. It is the specific number of days that you are required to trade while achieving the other rules. Placing one huge trade that hits the profit target and respects the loss limits does not tell prop firms anything about your ability to be profitable over a period of time. Prop firms want to ensure they are taking on traders who can be consistently profitable.

• Time Limit: This is the amount of time that the prop firm gives traders to complete the challenge. This period is unlimited for most prop firms these days.

The Two-Phase Structure: Evaluation and Verification

The two-phase challenge typically has a first evaluation phase and then a second verification. This challenge type is the most popular: this was the first kind of challenge that the earliest new-age prop firms made available. This is where a trader’s ability to place consistent trades, manage risk, and be profitable is really tested.

When you meet the profit requirement while respecting all drawdown limits consistently, the firm will notify you that you have passed the first phase and will introduce you to the second phase. In this phase, the goals remain the same, but the values for profit required and drawdowns may be less stringent.

In this phase, prop firms test if your system can be repeated to hit the goals set forth and to see that you didn’t just have a string of good luck.

Static vs Trailing Drawdown

A static drawdown is the maximum calculated loss from the initial balance, regardless of how much money you make or lose. A trailing drawdown, on the other hand, is the maximum calculated loss from peak equity per time. For example, assuming your starting balance is $50,000, and after two weeks, your available balance is $52,000.

Suppose you have a static and trailing drawdown of 10%, your static drawdown will be $5,000 for as long as you operate that account. However, your trailing balance at the start would be $5,000, but after two weeks, the new trailing balance would be $5,200.

To put static and trailing drawdowns in a better context, consider the table below:

Now that the rules are clear, you must note that the single most important factor for success as a prop firm trader is your mindset, not even your strategy.

Building the Right Mindset

Not many people will tell you this for free, but the psychology of a funded trader, especially one who is consistently profitable, is different from that of a regular trader. Before you buy a challenge, you must work on your mindset in the following ways to have a greater chance of passing:

1. Emotional discipline: In regular trading, traders may go through any of these emotions from time to time, experiencing fear, greed, and hope, and may even practice revenge trading. The difference is that prop firm challenges supercharge these experiences and are designed to provoke these emotions on a larger scale, thanks to significantly larger capital and analytical tools that tell you exactly how your trades are performing.
2. Choose Process over Outcome: The fact that your trades hit TP does not always reflect excellent trade setups and management. Prop firm challenges will expose this. In regular trading, you can afford one or two lucky wins, but when trading a prop firm challenge, you can’t push your luck all the way to the profit requirement. Even if you do, in a typical two-phase challenge, for example, you will be required to do it all again. It is always better to focus on finding, executing, and managing only the best setups. When this is the goal, making a profit will be a natural by-product.
3. Patience is a strategy: You must be willing to wait for your ideal setup. In your mind, it must be clear: you either trade your ideal setup or you do not trade at all. This is why modern firms like OneFunded structure their challenges with realistic rules like the no-time limit. Their challenges are designed to identify traders who possess this disciplined, patient mindset, rather than encouraging reckless gambling to beat the clock.

A strong mindset is essential, but it is only the foundation. You also need a feasible trading plan to pass your prop firm challenge.

Crafting a Winning Trading Plan

Before you start your prop firm challenge, if you do not have a concrete trading plan in place, you will be reactionary, making decisions as you go. This is a recipe for revenge trading when trades don’t go your way. So, let’s create your trading plan together.

The Non-Negotiable Elements of Your Plan

All the following have to be pre-decided and demo tested before you buy a prop firm challenge.

Markets and Instruments

You need to be clear about what you will trade. This is not guesswork and should not be left to how you feel on any given day of the week. Your decision should be based on empirical data from demo testing. After demo trading for a little while, look through your trading journal and ask yourself, What set of instruments gave me the best results for my strategy? Those are the instruments you want to be trading. That’s not all.

After selecting these instruments with the best results, you should do another round of backtesting and forward testing on the same set of instruments to double-check. Your final selection should only have instruments that showed continuous positive results after double-checking with your strategy. Now, you’ll know the exact instruments to trade when you start your prop firm challenge.

Trading Session

There are about four trading sessions each day: the Tokyo, London, New York, and Sydney sessions. While price action waits for no one and is always on the move when markets are open, most of the volume of trades per day and price action movement are typically seen within these four sessions. This means that any one of these sessions is a good window to place your trades. Again, it comes down to demo testing.

You’ll never know what works best for you if you never try it. Observe your trading over a period of time. Find out the session where you are most mentally active, where you seem to find good trades that align with your strategy. These are the sessions where you will be scouting for ideal setups to execute when you start your trading challenge.

Clear Entry and Exit Protocol

Most traders fail because they do not have a clear entry and exit protocol, not because their strategy is bad. Entries must be well timed, and you must recognize after entering trades that you are not to be in those positions indefinitely. Before you start a trading challenge, look at your strategy again. Suppose you trade trend breakouts, study many similar breakout examples, and look for suitable entry and exit levels that:

• Help you profitably maximize the range of price movement at that point in time.
• They are common to all your breakout examples

Once your eyes become trained to spot these levels, you’ll know exactly what you are looking for to enter and exit trades when trading a prop firm challenge.

Risk-to-Reward Ratio

The risk-to-reward ratio is a comparison between how much you are risking in pips and how much you stand to gain in pips.

Ideally, the minimum risk-to-reward ratio your strategy should afford you is 1:2, meaning that you could potentially earn twice as much as you risked if price action hits your take-profit (TP). This also means that for every two trades you lose, a single trade that you win evens out the losses.

The Power of a Simple, Tested Strategy

Some traders have the erroneous belief that a strategy is likely to be more profitable the more complex it is. They couldn’t be farther from the truth. A simple, adequately tested, and proven strategy will always trump a complex one in the sense that:

• It is easy to remember
• It is quick to execute
• There are fewer opportunities for human error when executing under pressure.

Please note that the aim here is not just that the strategy be simple, but that it is simple to quickly master.

Backtesting and Forward-Testing with the Prop Firm Rules

This is the game changer. Most traders demo test (backtest and forward test) sometimes for months before buying their prop firm challenge, and yet, they fail because they neglected the place of backtesting and forward-testing with the prop firm rules. We consider such demo testing a waste of time. By the time you are ready to demo test, you should know the exact prop firm you intend to work with. The beautiful thing is that prop firms publicize their rules for all to see.

As such, instead of subjecting yourself to the rules of the prop firm for the first time while undertaking the challenge, you can note all the necessary rules (profit requirement, daily and overall drawdown limits, and consistency rule) and give yourself a period of time (preferably between two weeks and a month) to apply them consistently to your trading.

This kind of backtesting and forward-testing helps you get accustomed to the way your prop firm of choice operates. Once you can hit profitability this way, meeting all the requirements and upholding all the rules, you’ll know for sure that you are ready to pass the challenge. Your newfound confidence will not be from your thoughts alone, but from empirical backtesting and forward testing data. This brings us to the importance of trade journaling.

The Role of a Trading Journal

Trade journaling is not just about reviewing the outcome of trades; it is also for recording your emotional state and adherence level to the plan. Your trade journal should be so detailed that it helps you know your strengths, weaknesses, and results over a fixed period of time. Professional traders take journaling as seriously as executing trades.

After all is said and done, the most well-crafted plan is useless without the discipline to manage risk. Let’s delve into the practice of capital preservation.

Risk Management Techniques

Risk management is the engine that powers your trading. Your trading may be excellent for all its worth, and yet be unprofitable because of a lack of discipline and consistency in risk management. So, how do you get your risk management on track?

1. Position Sizing

A position size or lot size reflects in your trading window or trading platform how much of your account you are willing to risk on a single trade. Getting this right is what keeps you in the game long enough to hit your profit target. You should always risk a small, fixed percentage of your account on each trade. We’ll explain some more in a bit, but a good range is between 0.5% and 1%, depending on the risk-to-reward ratio of your strategy.

Imagine your strategy has a poor risk-to-reward ratio, 1:1, for instance, it is not advisable to risk less than 1% per trade. In such a situation, risking as low as 0.5% per trade will leave you with a mountain to climb before reaching the profit requirement for passing the challenge. More specifically, you will need 12 wins to reach 6% profit and 20 wins to reach 10% profit, assuming there are no losses at all, something that is statistically impossible.

Bear in mind that risking 1% per trade will significantly reduce the number of trades you can lose before hitting your daily drawdown: typically between 4 and 6. However, that’s still a decent number compared to risking 0.5% per trade, considering that it also reduces the number of trades you have to win before hitting your profit target.

Suppose your strategy has a more robust risk-to-reward ratio, say 1:2 and above, you can afford to risk anywhere between the recommended 0.5% and 1%. With such a small risk, even if you have a string of losing trades, you will still have most of your capital left to recover.

To calculate your position size, you need to be sure of how much money as a percentage of your capital you are fine with losing on each trade and where your stop-loss will be. The stop-loss is the price that tells you your trade idea was wrong, and it is time to exit.

For example, imagine you have a $100,000 challenge account and you decide to risk 0.5% per trade. This means you can only lose $500 on any single trade. Now, if your trading strategy requires a stop-loss that is 50 pips away from your entry point, you need to calculate a position size where a 50-pip loss equals exactly $500. This precise calculation ensures you never lose more than you planned.

Luckily, you do not have to do any hard math. Most trading platforms have a free tool called a position size calculator. You can also find variants of this tool for free on the internet. You just need to tell this tool the amount you want to risk, your starting capital, how far away your stop-loss is from the entry in pips or units, and the instrument you are trading.

The tool then instantly tells you the exact lot size to use. This helps you place your trade without risking too much.

2. The Unbreakable Stop-Loss and Realistic Risk-to-Reward

A stop-loss is an automatic order that closes your trade at a specific price to cap your loss. You must use a stop-loss on every single trade, no exceptions. Thinking you can watch the trade and close it manually is a dangerous gamble. Emotions and market speed can lead to significant losses before you can swoop in to mitigate them.

Along with a stop-loss, you need a take-profit order. This is why your risk-to-reward ratio is so important. Aim for a ratio where your potential profit is at least twice your potential risk, like 1:2 or more. It makes your trading a whole lot easier. This simple math is powerful. It means you can be wrong more often than you are right and still be profitable.

Suppose you take 10 trades within a defined trading period, risking only $20 per trade (1% of a $2,000 account). Let’s say you win only 40% and lose 60% of your trades while running a 1:2 risk-to-reward ratio. You would have lost $120, but because you make twice the amount lost on each trade in profit, you would make $(2 x 20) per trade, leading to $160 if you win 40% of trades. You end up being $40 in profit overall. That’s the power of a good risk-to-reward ratio.

3. Managing Daily Drawdown

Prop firms set a daily loss limit, but smart traders set their own, stricter limit. Suppose your prop firm says your daily maximum loss is 5%, you should stop trading for the day after losing just 2% or 3%. This self-imposed rule creates a safety buffer.

It prevents one bad trading session from threatening your entire challenge. When you hit your personal daily loss limit, close all trading platforms and walk away. The market will still be there tomorrow. With a strong mindset, a detailed trading plan, and risk management in place, you can focus on tactical execution during the challenge itself.

Technical and Strategy Preparation

You need to be methodical and strategic once your challenge account is live and the money you used to purchase the challenge is on the line. Here are a few things to consider.

The Art of Consistency and Patience

The “Minimum Trading Days” rule is not your enemy. It is your friend. It forces you to be patient and spread your progress over time. This is what real, sustainable trading looks like. You cannot rush it.

Treat your challenge like a normal job. Show up during your planned trading sessions, look for your ideal setups, and if you do not find any, log off. Consistency is not about trading every day. It is about following your plan every single time you decide to trade.

Avoiding Tactical Errors

Many traders fail not because their strategy is bad, but because they make simple tactical errors like:

• Overtrading: Overtrading happens when you take trades that are not your ideal setup out of boredom or impatience.
• Revenge Trading: Revenge trading is when you immediately jump into a new trade to win back the money you just lost.
• Strategy hopping: Strategy hopping is when you abandon your plan after a few losing trades to try a different method. This ensures you never master any one approach.

Trading from an emotional place almost always leads to more loss. As much as you can, avoid it.

Navigating Different Market Conditions

The market will not always be the same. Some days will be volatile with large price swings. Other days will be quiet with very little movement. Your trading plan should already define what a good trade looks like in any condition.

In volatile markets, your stop-loss might need to be wider, meaning your position size must be smaller to keep your risk the same. In quiet markets, you may settle for finding fewer trades that meet your criteria. The key is to stick to your plan and not force trades just because the market is moving. Even with the best preparation, always remember the following mistakes that traders make once they start their prop firm challenge.

Common Mistakes and How to Avoid Them

Some of these mistakes include:

1. Ignoring drawdown type: Suppose your challenge has a trailing drawdown and you think it is static; it may shock you to find that your challenge ends after a small loss following a period of profit. The solution is simple. Before you place your first trade, know for sure if your drawdown is static or trailing.
2. Over-leveraging:. The fact that the prop firm gives you high leverage does not mean you should use all of it. Using too much leverage on a single trade is like driving a car too fast. A small mistake can quickly become a huge crash. The solution is to be conservative with leverage.
3. Chasing the profit target: Some traders see the 10% goal that their prop firm may require (prop firms have varying profit targets) for passing a challenge and take huge risks to get there quickly. This usually leads to breaking the loss limits. The solution is to forget about the profit target. Focus only on executing good trades that fit your plan. The profit will come as a natural result of your consistent process.
4. Starting the challenge without practice: Jumping into a paid challenge with a strategy you have not thoroughly tested is a waste of money. The solution is to demo trade your plan with the prop firm’s rules until you can consistently be profitable for at least a few weeks. This proves you are truly ready.

Conclusion

As we have seen, the best approach for passing a prop firm challenge is built on a few key principles. You need the discipline to follow your plan no matter what. You must have absolute control over your risk, protecting your capital above all else. A detailed and tested trading plan based on your preferred prop firm’s rules is non-negotiable. And finally, you must have the patience to let your profits grow steadily over time.

Success in these prop firm challenges is built on consistent habits, not on shortcuts or secret indicators. There is no magic trick. Prop firm trading is about doing the right things, trade after trade, day after day.