Trading Blog

Mastering Risk Management Tactics for Prop Firm Trading Challenges

LIM WEI XIANG

Mar 6, 2024 — 4 min read

Never goes more than 2% per trade!

TL;DR

Secret risk management to pass prop firm challenges.
0.5% per trade until 5% profit level, 1% per trade until 10% profit target.
Never risk 2% per trade!

Disclaimer: I am not a financial advisor. The content for this article is purely for educational/research purposes only and is merely based on my personal opinions.

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In my view, achieving success in the trading realm involves two primary paths: possessing substantial capital or affiliating with a proprietary trading firm that provides funding to augment your earnings. Many traders, myself included, often consider joining a proprietary firm to elevate their income and transform trading into a viable career. Despite common assumptions, the most crucial factors for success aren’t solely reliant on a powerful trading strategy. Instead, proficiency in risk management strategy stands as the fundamental pillar for achieving consistent and enduring success in the world of trading.

Risk management should be the top priority

Risk management in trading is about precisely calculating the risk per trade, determining the appropriate position size, and establishing stop-loss and take-profit levels. This initial step is crucial before executing any trading strategy. As the saying goes, the key to profiting from trading is first to prevent losses. It’s vital to limit potential losses as much as possible when trades move unfavourably. By effectively managing risk, we prioritize safeguarding our capital, ensuring that even in adverse market conditions, our losses remain controlled and manageable.

Rules in Proprietary Trading Firm

In contrast to managing your personal trading account, Proprietary firms typically enforce stringent risk management protocols for their traders. For instance, in my prop firm, the5ers, there are specific rules such as maximum and daily loss limits, along with a 10% profit target. These constraints compel traders to adopt structured risk management practices, shaping and defining the parameters of our trading systems. These measures are essential as they ensure a disciplined approach to risk, guiding traders to navigate markets more cautiously and strategically to protect against excessive losses. Here are some tips that I personally used to reach the profit target faster.

0.5% per trade for the first 5% profit level

If our challenge sets a 10% profit target, it’s advisable to initiate the initial trades with a risk of 0.5% per trade. This lower risk percentage serves two purposes: it helps to mitigate potential losses and allows for testing the viability of the chosen strategy. It’s recommended to maintain this 0.5% risk per trade until reaching the 5% profit level, gradually building up towards the set profit target while exercising caution and assessing the effectiveness of the trading strategy.

1% per trade until 10% profit target

After attaining the 5% profit level, consider increasing the risk per trade to 1% as part of the strategy to approach the 10% profit target. At this stage, the rationale is that having secured a portion of the desired profit (5%), there’s more leeway to trade with a slightly higher risk. The aim is to potentially expedite reaching the 10% profit target within a shorter timeframe by adopting a slightly more aggressive approach while maintaining risk awareness and monitoring the trades closely.

If a sequence of consecutive losses results in the account balance returning to a 0% profit level after reaching the 5% milestone, it’s prudent to revert to the initial risk level of 0.5% per trade. This adjustment aims to preserve capital and gradually rebuild the account without risking substantial losses. Returning to the lower risk percentage allows for a more conservative approach to grow the account steadily while reassessing and possibly adjusting the trading strategy to regain momentum and avoid significant drawdowns.

Never use 2% per trade — unless you are trading your account.

Under no circumstances should a 2% risk per trade be utilized, except when trading with your personal account. This risk percentage is excessively high and significantly increases the chances of hitting the maximum stop-out level swiftly, resulting in immediate failure of the trading challenge. To ensure sustained participation and success in the long run, it’s strongly advised to stick to a more conservative approach by employing 0.5% or 1% risk per trade at every stage of the funding process. This cautious risk management strategy aims to protect the account from substantial losses and enables a more sustainable and controlled trading journey.

Endnote

Becoming a consistently profitable trader is indeed a challenging task due to the multitude of factors to consider and track. Even a slight deviation from these factors can potentially lead to immediate failure in a trading challenge. Hence, the paramount skills required for any trader are discipline and consistency. Maintaining a disciplined approach, adhering to established strategies, and consistently applying them despite market fluctuations or temptations to deviate are crucial elements for success in the trading arena. These qualities act as pillars supporting a trader’s ability to navigate challenges and pursue long-term profitability.