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Proprietary trading presents a distinct approach to engaging with financial markets, especially when contrasted with conventional trading methods conducted through brokers. In this article, we will explore the insider strategies and insights from two successful prop traders who have overcome the challenges posed by prop trading firms.
Desmond – 34 | Passed 100k Prop Firm Challenge
First off, we have Desmond, a distinguished figure in the world of financial trading and analysis. Desmond started his career at one of the largest technical research houses, where he provided expert advice on technical analysis to major banks and hedge funds, with a particular focus on Elliott Wave theory and Fibonacci techniques.
His expertise led him to establish a company renowned for providing accurate investment forecasts to many of the world’s largest brokerages. Desmond’s contributions were recognised as he became a finalist for the Best FX Research House at the prestigious Technical Analyst Awards (London) for three consecutive years—2019, 2020, and 2021.
Demonstrating his prowess in practical application as well, Desmond took on a 100k prop firm challenge and succeeded on his first attempt, showcasing his mastery in navigating complex market environments.
Part 1: Trading Strategy
Can you describe your go-to trading strategy when it comes to prop trading and how did you develop this technique over time?
Desmond: I played around with many different trading indicators, strategies and approaches over my years in trading. There wasn’t an indicator that I didn’t try, going from the basic stuff like oscillators to the advanced stuff like Elliott Wave and the crazier stuff like Hurst Cycles.
It was when I was at my previous research firm that I learnt how they combined different types of studies together, across different time frames, and utilising correlation to filter out different setups – did I suddenly realise how to trade properly.
The strategy is simple – use 5 different approaches across different types of studies. Do not take them from the same “camp”. For example, Stochastic and RSI are from the same camp – both being overbought or oversold means nothing and instead gives you a false sense of confidence.
These are the 5 areas I look out for:
1. Momentum – I trade in the direction of momentum. So buys for bullish momentum and sells for bearish momentum. I try to look for channels or a sustained movement above the Ichimoku cloud (for bullish momentum) or a sustained movement below the Ichimoku cloud (for bearish momentum).
2. Supply / Demand zones – look for retests of a particularly strong level that was broken recently – and it should ideally be in the direction of the momentum.
3. Divergence – I try to look for bullish and bearish divergence vs RSI and Stochastic
4. Fibonacci Retracements / Extensions / Expansions / Projections – this is a massive topic, but I try to find at least 2 Fibonacci levels that line up with my entry.
5. Correlation – I try to find a correlated market to help me filter out the move. For example, if I was going long on EUR/USD, then ideally we should be seeing a resistance (to sell) for USD/CHF which is negatively correlated with EUR/USD. That way – you know that multiple markets are in agreement with you (and you’re not getting tunnel vision).
How have your adjustments to this strategy improved your success rate in passing various prop trading challenges, aligning with their specific rules and objectives?
Desmond: This strategy has helped me pass the prop firm challenges really easily. In fact, I hit my target in effectively 3 trading days and passed both phases in less than a week of trading.
Previously, when there was a time limit requirement of 30 days, it was quite tough as my strategies monitored charts on the 4-hour and 1-day time frame. But since they removed that rule, it became a lot easier as I wouldn’t be rushed into taking trades or compromising on entries.
The rules and objectives of prop trading are simple and correct – which is why when you have a really proper trading strategy, you won’t find that you need to change a lot to adapt to the rules.
What specific elements of the market do you focus on when applying this technique? For example, do you prioritise technical indicators, market sentiment, or macroeconomic factors?
Desmond: I prioritise technical indicators. I trade almost purely on technical indicators.
During a prop trading challenge, how do you assess the effectiveness of your strategy in real time? Do you use any specific metrics?
Desmond: You should not be assessing the effectiveness of your strategy in a prop trading challenge. That should have been done before in the demo environment or when practising with a smaller live account. But the metric that I do look out for is the profit factor. A bad metric to avoid is “win rate” because a good win rate means nothing if your losses are twice as large as your wins.
Part 2: Risk Management
What risk management practices do you follow and how did these evolve as you faced different challenges?
Desmond: I use entry, stop loss, take profit, break even, idea invalidation. Idea invalidation is probably the one that most people won’t know about as I coined the term – it is basically the level at which I move my take profit to entry as I know the trade ain’t working out and I want to get out of it as soon as possible – it’s essentially admitting you are wrong and trying to cut your losses.
This is less seen in the world of trading as people hate to admit they are wrong. But getting out when you are wrong is essentially saving yourself one winning trade (which you would have to make to cover the losses of a losing trade).
How do you adjust your risk management in response to market volatility?
Desmond: During volatile times – I always put my stop loss slightly beyond a major level and my take profit slightly before a major level. The reason for this is because you want to give your stop loss enough breathing room but you want to get out before the “chaos” for your take profit (which often happens at major levels where there’s a lot of volatility).
How do you balance risk and reward under the tight constraints of a prop challenge? Are there specific tools or indicators you rely on?
Desmond: I use my own MT4 Ultimate Trade Manager which helps me control my risk to reward very well. But even then – risk to reward means little as you need to factor in your hit rate. You need a combination of a decent hit rate and decent R:R to do well in a prop trading challenge.
Having a good risk to reward but only winning one out of every three trades will still result in you losing the prop trading challenge.
What are the most crucial risk management rules you abide by during prop trading challenges and how do these rules differ from your standard trading practices?
Desmond: They are actually the same – you should not risk more than 3% of your capital on any trade and only scale up your risk based on how good the setup looks. For example, start at 1% and if it looks good, scale it up to 1.5% and then 2%. Do not go “all-in” on a particular trade.
Part 3: Psychological and Emotional Discipline
How do you manage the psychological pressures of trading while maintaining focus and discipline?
Desmond: I am terrible at lower time frame trading – causes me to lose sleep. So I focus on a time frame that allows me more breathing space like the H4 and D1 time frame.
Also, I have a simple rule. 3 strikes and you’re out. Basically, if I have 3 consecutive losing trades in a day, I stop trading and just come back another day – my emotional state of mind wouldn’t be in the correct place if I tried to force myself to trade more.
Lastly, I do not have a daily/weekly target. I think those are artificial and unnecessary pressures you place upon yourself and you end up compromising your entries in pursuit of an arbitrary goal that has no relation to how good you are as a trader.
How important is emotional control in prop trading and can you share a situation where emotional control played a key role in your trading success?
Desmond: Extremely important. You can have the blueprint to trading success – but without proper emotional control, it’ll all be for nothing. The tendency to let your losses run and cut your profits is very common in traders because of the fear of loss – this nearly caused me when my trade was in profit and I was just watching it go up and down every tick. I wanted to close it earlier but decided to just unplug and drive home (during which it’s hard to check my phone and my trade) – when I returned home, I had hit the full take profit and that contributed a lot to me passing the prop trading challenge.
How do you handle stress during intense trading sessions, especially when facing the risk of disqualification in a prop challenge?
Desmond: I tried to take a step back and let myself see what I could learn from the failure. A failure is only a failure if you didn’t learn anything from it.
How has mastering your emotions impacted your decision-making processes during trades?
Desmond: You trade with clarity and know that it’s all about probability. Nothing is personal. A winning trade and a losing trade are all about probability – the trick is in lasting the long run over the law of large numbers – and you can only do that if you don’t let emotions get the better of you.
Bonus Insights: Tools and Resources
What tools and resources do you find indispensable for your trading?
Desmond: Myfxbook for tracking your instruments & day & time performance. You can do a lot of fine tuning knowing which days and instruments you trade better.
Lessons Learned and Advice for New Traders Interested to Join Prop Trading
What advice would you give to traders attempting to pass a prop firm challenge for the first time?
Desmond: Go slow and steady. Don’t try to go “all in” and get lucky. You want to build on this amazing opportunity by building it on a stable foundation – and that can only be done by trading properly with a sound strategy.
Peggy, Passed 100K prop trading challenges [10s] times
Peggy ventured into the prop trading industry during the COVID-19 pandemic in 2019, having begun her trading journey with Forex in 2017 while balancing a part-time job. Over the years, she has taken on prop firm challenges more than 50 times, successfully passing over 30 of them and withdrawing profits on more than 20 occasions. Her extensive experience and resilience highlight her proficiency and dedication in the trading world.
Part 1: Trading Strategy
Can you describe your go-to trading strategy when it comes to prop trading?
Peggy: From scalping to day trading, consider looking at market structure from a bigger timeframe
What adjustments did you make to this technique to better align with the rules and objectives of different prop trading challenges?
Peggy: Trade in the European session because it has more liquidity than the Asian session. Set a clear trading plan and follow it. If you reach your target for the day, stop trading. Then, come back to trade again the next day, even if you hit a stop loss.
What specific elements of the market do you focus on when applying this technique? For example, do you prioritise technical indicators, market sentiment, or macroeconomic factors?
Peggy: Those are all important parts of the trade setup. You can’t look at just one.
During a prop trading challenge, how do you assess the effectiveness of your strategy in real time? Do you use any specific metrics?
Peggy: If scalping, look at the win rate. If day trading, look at the risk and reward
Part 2: Risk Management
What risk management practices do you follow?
Peggy: I always place stop losses on every trade to manage potential losses and avoid making emotional decisions. Additionally, I set a maximum allowable loss for each trading day to prevent significant drawdowns.
Mandatory Stop Losses: I place stop losses on every trade to manage potential losses and avoid emotional decision-making.
Daily Loss Limit: I set a maximum allowable loss for each trading day to prevent significant drawdowns
How do you adjust your risk management in response to market volatility?
Peggy: Monitor Market News Closely, Reduce Position Size and Widen Stop Losses
Are there specific tools or indicators you rely on to make these assessments?
Peggy: Focus on high-probability setups and selective trading. I only take trades that meet all my criteria for a high-probability setup. This might include technical patterns, confluence of indicators, and fundamental analysis
What are the most crucial risk management rules you abide by during prop trading challenges?
Peggy: Use stop loss, position sizing and avoid overtrading
How do these rules differ from your standard trading practices?
Peggy: Stricker daily loss limit and intensified risk per trade
Part 3: Psychological and Emotional Discipline
What specific practices help you maintain focus and discipline?
Peggy:
Achievable Targets: I set realistic and achievable trading goals. This helps manage expectations and reduces stress
Limit Losses: By setting strict risk limits and stopping losses, I protect my capital and reduce the fear of large losses
Position Sizing: I ensure my position sizes are appropriate for my risk tolerance, which helps me stay calm during market fluctuations.
Share a situation where emotional control played a key role in your trading success.
Peggy:
Scenario: During a particularly volatile market period, I was trading the EUR/USD pair. The market was reacting to unexpected economic news, causing rapid price movements and heightened volatility.
Challenge: I had identified a high-probability trade setup and entered a long position. Shortly after entering the trade, the market moved sharply against my position, triggering my stop loss and resulting in a loss. The immediate reaction was frustration and the temptation to quickly re-enter the market to recover the loss.
Pause and Breathe: I took a few deep breaths to calm myself and prevent an impulsive reaction.
Review the Trading Plan: I revisited my trading plan and reminded myself of the importance of discipline and adhering to my risk management rules.
Accept the Loss: I accepted the loss as part of trading and reminded myself that losses are inevitable but manageable with proper risk management
Wait for the Next Setup: I patiently waited for the next high-probability trade setup that met all my criteria before entering a new trade.
Are there any stress-reduction techniques that you find particularly effective?
Peggy:
Positive Self-Talk: Use affirmations and remind yourself of past successes to build confidence.
Maintain a Healthy Lifestyle: Exercise regularly, maintain a balanced diet, and ensure adequate sleep
Mindfulness and Meditation: Practise short mindfulness sessions to reduce stress and improve focus.
Engage in Hobbies: Pursue non-trading activities to create a balanced lifestyle
How has mastering your emotions impacted your decision-making processes during trades?
Peggy: By mastering my emotions, I was able to execute the trade with discipline and patience, resulting in a well-managed trade that adhered to my strategy. Even though the trade hit my stop loss, the controlled response allowed me to maintain confidence and continue trading effectively.
Bonus Insights: Tools and Resources
What tools and resources do you find indispensable for your trading?
Peggy:
Economic Calendars: Websites like Forex Factory and Investing.com provide economic calendars that list important economic events and data releases
Position Size Calculators: Online tools or built-in features in trading platforms to calculate optimal position sizes based on risk tolerance and stop loss levels.
Technical Indicators: Essential indicators include moving averages, RSI (Relative Strength Index)
Drawing Tools: Tools for drawing trend lines, support and resistance levels, Fibonacci retracements, and other key levels
Lessons Learned and Advice for New Traders Interested to Join Prop Trading
What are the most important lessons you’ve learned from your experiences in prop trading?
Peggy:
Discipline and Risk Management: Adherence to rules and protecting capital are non-negotiable.
Emotional Control: Maintaining composure and avoiding impulsive decisions are crucial
Continuous Learning: Stay informed and adapt to new market conditions and strategies.
Patience and Realistic Expectations: Focus on long-term goals and manage expectations.
Detailed Planning and Preparation: Develop and follow a solid trading plan.
What advice would you give to traders attempting to pass a prop firm challenge for the first time?
Peggy:
Understand the Rules and Requirements Read Carefully: Read and clarify the prop firm’s guidelines and requirements.
Ask Questions: If anything is unclear, don’t hesitate to ask the firm for clarification. It’s crucial to know exactly what is expected
Focus on Risk Management: Set daily loss limits and risk only 1-2% of your account per trade
Maintain Emotional Control: Stay calm, avoid revenge trading, and use stress-reduction techniques.
Be Patient and Selective: Wait for high-probability setups and prioritise quality over quantity.
Focus on the Process: Consistently execute your strategy and treat the challenge as a learning experience.
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