Trading Psychology · 2023-10-18

The Nature of Prop Firm Trading and How to Make Money From Trading

Recently, prop firm challenges have become popular and have attracted many traders to take part. Besides getting to hold a large account to trade, the high level of profit is what is attractive to all traders.

But the truth is that prop firm challenges are not as easy as you think. Because the firms set out criteria that sound quite easy, but in reality are not like that at all.

You have to pass 2 challenge phases, with targets of 10% and 5% profit on the account. But along with that, you must not lose more than 5% / day, and 10% for the challenge process. It means you have to make a profit of 100% and 50% on the amount of money that can be lost.

That means, with a normal trading account, you would have to double the account. And after that, you need to make an additional 50% of the account in the next phase. If you lose, you will lose the challenge fee money. Getting to hold a funded account is not simple at all, but it is not impossible to do.

The nature of today's prop firms.

There is a truth that most of a firm's revenue comes from challenge fees. And only after the firm MFF was called out by the US Commodity Futures Trading Commission (CFTC) did we realise the nature of the firms. MFF was accused of defrauding more than 300 million USD in challenge fees from more than 150,000 traders.

In reality, many traders holding funded accounts still make money, but that is a very small portion. The money they receive is taken from revenue from challenge fees rather than from trading activity. Each firm will create or link with a Broker and use that as the place for traders to trade.

As you can see, the firm's interests conflict with the individual trader's interests. Only when the money earned from registration fees is greater than the cost the firm pays to profitable traders can the firm sustain itself.

But according to the data I have, the rate of people who make money from prop firm challenges is very low. Therefore, this model will continue to exist for quite a long time to come.

How to make money from trading firms.

You have certainly heard many traders talk about some tips and tricks when trading with a firm. Most of them are aimed at making a quick profit and wanting to make money really quickly. But do you aim to make a profit in a sustainable way or not?

I would advise you to aim to treat trading as a serious job. And just try to think: you can do it anywhere, and even when you retire. It is a long-term job and you also need to invest a large enough amount of effort.

I will not advise you to buy many funded accounts and trade them in opposite directions to each other. Either way, there will be an account that makes a profit. Nor will I advise you to enter all-in trades to try your luck.

What I want to share with you is a correct mindset for the job of trading. And through that, you will become a sustainably profitable trader.

Point 1: You need a good trading method

I mean a good trading method, not a perfect one. A trading method gives you an edge when entering a trade and at the same time, in the long term, it will be profitable. When I first started trading, I heard that there is no method that in the long term has 100% winning trades. But it took me many years to really believe that. I think this is a mistake that almost all traders make.

Because when we expect to find a perfect trading method, we will experiment from one method to another. Perhaps we will know a lot of indicators, know many things. But in reality we know nothing! Because if you knew, you would not have spent so much time like that trying and failing.

In reality, every method is profitable in the long term. But its downside is the losing streaks. Your problem when you encounter a losing streak is whether you have the confidence to follow that method or not?

If you do not yet have a good method, you can refer to the Smart Money Concepts trading method.

Point 2: The trading method must suit you personally.

This is very important, because you know that trading is about making decisions. If that trading method does not suit you personally, a conflict will occur.

Example: You do not like losing too much; you like making a profit every day. And suppose you use a trading method with a low win rate, but in return the profit will be much higher. And you have to wait quite a long time to have a trade. Have you seen the conflict here yet?

When a conflict occurs, even at the smallest level, it leads to wrong decisions. It will accumulate gradually and erupt at some point. It could be at times when your trading gets out of control, overtrading.

I think you have probably experienced this a few times and repeated it over and over as if there were no way out.

Point 3: You must trust the trading method

When you have a good trading method and that method suits you personally. But do you believe you will make money from it or not? That is another matter.

I think this is the hardest thing in trading. It is almost a leap in belief and in your trading results.

I mean, you will not have to go through a cycle of profit then loss repeating over and over. Instead, you will earn a sustainable profit.

Sounds hard to understand, right? I will give you an example!

When entering a trade, you place the stop loss point at a safe zone. You know that stop loss will protect your account if you are wrong or the market reacts abnormally. When you place a stop loss you know there is a possibility you will lose money. But do you really believe you will lose money?

Is the answer no? Then when price goes against your assessment, price gets close to the stop loss point. At this point you do not believe this is a losing trade. Am I right! Suppose you are lucky, price turns around and goes to your take profit point; you feel happy and full of confidence. Then in the next few trades, you are not so lucky; price touches the stop loss point, you lose money.

Your reaction is to not believe what just happened. In you arises the desire to enter a revenge trade against the market; you enter with a large volume and move the stop loss point really far away. At this point, you make 2 mistakes: first, entering a trade that does not follow the trading method. Second, entering a trade with too large a volume and placing the stop loss too far away.

You can probably guess the outcome of this!

Conclusion

I think the hardest problem in trading does not come from the method. It comes from each of us personally. To become a successful trader, the trading method is important, but trading psychology is even more important.

Thank you for reading to the end of the article; I wish you find your path on this trading journey.

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