Prop trading can feel like stepping into a high-stakes game with no rulebook. While the profit potential is real, many new prop traders often fall into easy pitfalls, derailing their profitability.
The good news? Learning from others’ errors can help you create more effective strategies and improve your risk management.
Here are the five biggest mistakes new prop traders make — and how to avoid them.
5 Mistakes New Prop Traders Make
Many new prop traders have the drive and market knowledge to succeed, so why do so many crash early? The answer often lies in habits that sabotage success.
1. Poor Risk Management
New traders often fixate on chasing profits while downplaying the dangers of losing streaks.
Risk management is crucial because if you disregard it, a few losing trades can wipe out your account before you even get started.
For instance, putting all your eggs in one basket can leave you vulnerable. If that sector takes a hit, so does your entire account. Diversifying across multiple asset classes and strategies can protect you from a sudden downturn.
Another major issue is ignoring drawdown limits set by prop firms. Most firms have hard limits on how much you can lose before they shut down your account. You could end up locked out if you don’t manage risk properly, and you would have to start the entire evaluation process all over again — a costly and frustrating cycle.
2. Trading Without a Plan
Many new prop traders jump into the market without a well-defined plan, assuming they can react quickly and make smart decisions. Unfortunately, that rarely works.
If you don’t follow a strict approach, emotions can start getting the better of you, resulting in impulsive entries, panic-driven exits and erratic risk-taking. For example, if you chase trades driven by FOMO, you could sell winning trades too soon while sticking with losing trades, believing they’ll rebound.
These emotional swings can produce wildly variable results. One day you’re overly cautious, and the next you’re taking reckless risks. This creates a cycle that can keep you stagnant.
Worse, inconsistency can make it difficult to track what’s working. Without an organized plan, you can’t learn from the mistakes new prop traders make or refine your strategy. This can cause progress to stall as the same mistakes keep repeating.
3. Overtrading
Overtrading happens when you place too many trades or hold more positions than your available capital can support. After a loss, you might start to feel pressure to “win back” some money and begin trading more aggressively. On the flip side, winning too much may cause overconfidence and tempt you to risk more. Both can push you away from discipline and toward emotional decision-making.
4. Emotional Trading
Even the most strategic trading strategy is prone to emotions. You could be so overcome with fear, greed or anger that you abandon your plan. This could mean jumping into a trade without meeting your own entry rules because excitement has taken over or sticking with a losing position for too long because accepting defeat feels too painful.
One such snap decision can lead to losses, which in turn can cause further emotional reactions and additional rash decisions.
5. Choosing the Wrong Prop Trading Firm
With the right prop trading firm, you can get helpful resources, fair profit-sharing, and the support you need to grow. With the wrong ones, though, you could end up trapped in frustration, losses or dead ends.
To make the right choice, start by looking into the firm’s regulatory status. Legitimate proprietary trading firms follow financial rules and hold proper licenses. If they’re not transparent about their legal standing, you might want to reconsider your options.
Next, look at their history. A company with a track record of successful traders and consistent payouts is usually a safer bet than a flashy new entrant making sweeping promises.
Also, steer clear of prop trading companies with unclear assessment systems. Some prop trading firms set up confusing evaluation criteria or impose tough limits to prevent traders from qualifying because they profit from evaluation fees, not successful traders. If it feels like the rules are written to confuse you, then it might be a good sign to walk away.
Similarly, profit-sharing terms should be clear. Every company takes its cut, but the split should be fair, with no hidden clauses. A firm advertising “huge funded accounts” or “sky-high splits” could have strings attached, such as unrealistic trading conditions or delayed payouts.
If it sounds too good to be true, it probably is. Take the time to read the fine print.
How Can Prop Traders Avoid These Mistakes?
No trader can control the markets, but what is in your control is how you prepare and respond.
Your number one priority should be protecting your capital. Stop-loss orders can help with this by limiting your losses to 1 to 2% of your account per trade. This way, one miscalculation doesn’t turn into a big loss.
Diversifying trades into various assets, such as stocks, forex and futures, can also reduce dependence on a single asset class, making your strategy more resilient.
Having a clear plan is equally important because trading is often driven by emotion. Without a formalized process, emotion takes over, leading to the typical impulsive trades that rarely pay off. For instance, you can consider setting specific rules for entering and exiting trades. You’ll then need to strictly adhere to those rules, even when emotions run high.
It’s also crucial to set realistic and achievable targets. Improving execution rather than chasing an arbitrary profit target can provide stable results. Check your progress regularly to maintain full focus on your goal rather than being swept up in what is happening in the market every day — a key trigger for frustration, impatience and bad decisions.
Also, consider setting daily trade limits and taking short breaks between trades to refresh and recharge.
After a big win or loss, step away for a while before you plunge back into the markets — do not let excitement or regret lead to reckless trading.
Build a Strong Trading Base by Avoiding These Errors
No trader gets it right every time, but avoiding these common mistakes new prop traders make can help you improve long-term outcomes. Prop trading offers big opportunities, but success comes down to discipline, preparation and smart decision-making.
Having a proper risk management process, following a strategic plan, avoiding emotional trades and selecting the right trading firm can set you up on a more sustainable road to growth.
Frequently Asked Questions
What is the number one mistake traders make?
A big pitfall many new traders fall into is focusing on profits but losing control over losses. This is a big mistake because these losses can destroy accounts in days.
How many prop traders fail?
It is estimated that between 80 and 90% of new prop traders don’t last long due to inconsistent strategies, overtrading or lack of discipline.
How much does the average prop trader make?
Earnings vary widely. Some make losses, while successful traders can earn anywhere from a few thousand to six figures per year, depending on skill, strategy and firm profit splits.
About Sarah Edwards
Sarah Edwards is a finance writer passionate about helping people learn more about what’s needed to achieve their financial goals. She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Her work has been published on NerdWallet and FinImpact.