How to Pass a Prop Firm Challenge

If you’re the best at your work, your pay should reflect that, right? Unfortunately, it doesn’t always work that way in the business world. With a proprietary trading firm or prop firm, though, that’s exactly how it works: your earnings match your skills. However, you have to know how to pass a prop firm challenge to get there.

If you can overcome the challenge, the firm will give you the capital you need to make trades. Few succeed, but if you take some time to ensure you’re prepared, you could be among them. 

What is a Prop Firm Challenge?

Most prop firms have a one- or two-step evaluation process that includes a challenge, which is designed to be a rigorous test of the candidate’s trading skills, discipline, and emotional control.

The specific challenges vary from one firm to the next but generally involve hitting a defined profit target while remaining within the firm's parameters. To prove that you can consistently be profitable in the financial markets, you’ll have to finish a series of tasks under the pressure of a timer.

What’s in it for you if you pass a prop trading challenge? Following a successful performance, the firm will fund an account (often between $10,000 and $100,000) for you to trade, sharing the profits with a typical split of 70/30 or 90/10 in your favor.

If you have the necessary skills, whether you’re a seasoned pro or a first-timer, you could gain access to the firm’s capital to trade with instead of using your own money.

How to Pass a Prop Firm Challenge

When gearing up for the challenge, consider that the firm will evaluate whether it can trust you with its money. It’s a serious business, one that requires serious preparation. Here are a few tips on how to pass a prop firm challenge. 

Understanding the Challenge and Rules

A key starting point for understanding prop firms and the challenges they set is to remember that the firm isn’t just gauging how well you trade – its leaders will also be looking at how you trade.

The firm will evaluate your discipline and ability to demonstrate appropriate risk management. As such, it’s essential to understand and follow the various rules and parameters – drawdown limits, maximum loss limits, minimum trading days, etc. Neglecting to do so could result in a disappointing failure.

Prepare Before Starting the Challenge

The process can take weeks or even months, and you should be ready to spend an equivalent amount of time getting ready. Learn everything you can about the firm, its trading criteria, its rules, its profit goals, and the instruments you’re allowed to use. You may have a terrific trading strategy, but it won’t do you good if it’s outside the firm’s bounds.

Your preparation should also include honing your basic trading skills, including technical analysis, fundamental analysis, risk management, emotional control and market knowledge. There’s no substitute for mastering the fundamentals of trading.

Develop and Stick to Trading Strategy

Whatever your preferred type of trading – day trading, swing trading, scalping, etc. – you’ll need to develop a clear, thorough, effective trading strategy for the challenge and stick to it.

Don’t wait until the challenge begins to test your strategy – perform backtesting, using historical data to judge its effectiveness, and refine it as needed to understand your outcomes before the challenge. While backtesting takes time, it also elicits enormous value and data that can help you determine whether your approach is viable.

Start Small and Manage Risk During the Challenge

Practice solid risk management techniques to pass a challenge of this nature. With prop trading, risk management requires assessing your risk-to-reward ratio, sizing up your position, setting stop-loss limits, controlling your emotions, and diversifying your trades.

You must start small and know when to cut your losses and when to let your profits run. Managing risk is about more than just limiting losses. You also want to optimize profits while controlling any downsides.

Keep Emotions in Check

Trading is already pressure-packed, and a prop firm challenge can bring out many emotions. It’s important to keep your cool. Getting too eager or frustrated can impact your decision-making abilities, making bad decisions worse and potentially leading to huge losses.

It’s easy to say that you should remove all emotion from your trading, but that’s precisely what you need to do – be rational, dispassionate and objective. Treat trading as a learned skill and build discipline and focus long before the challenge.

If possible, seek out a mentor to discuss emotional control. Try practicing mindfulness and keeping a trading diary to reflect on your trades, all with the goal of not reacting with emotion under the pressure of the challenge.

Evaluate Performance and Adjust Strategy

After you finish a prop firm challenge, evaluate and reflect on your performance.

Whether attempting a prop firm challenge or trading on your own, this is a good practice. Regular review (another area where maintaining a trading diary is extremely useful) can help you make necessary adjustments to your trading strategies, improving your results.

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Reap the Rewards of Challenging Your Trading Skill

Passing a prop firm challenge can open the door for you to trade with someone else’s capital, but it will require foundational knowledge, a sharp skill set and ample preparation.

Many traders accept such challenges, but few come away successful. You can improve your chances by learning about the firm and the rules it’s devised, developing a smart trading strategy, deploying solid risk management practices, keeping emotions out of the picture and continually reviewing your performance.

Just as importantly, do your research to find a prop trading firm that fits your style. That way, you can work toward building a mutually beneficial partnership with the firm.

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