A solid trading strategy is the foundation of prop trading success. This article discusses the key elements of a good prop trading strategy, including risk management, strategy selection, goal-setting, and performance tracking. Regardless of your degree of experience, take these essential steps to increase your trading consistency and succeed in a prop firm environment.
Prop trading allows you to trade with large sums of money and get a split of the profits if you can demonstrate consistent performance. In our previous blog articles, we have introduced what prop trading is,touched on the benefits, and how to overcome the difficulties of prop trading.
As the saying goes, ”failure to plan is planning to fail”. The first step to success in prop trading is having a well-thought-out plan. In this article, we will discuss how to develop a prop trading plan that will help you level up as a trader, pass the evaluation phases, and stay profitable.
1. Determine your prop trading goals
First, you need to set realistic, measurable objectives for your trading. Avoid vague goals, such as "make more money." Generally, specific, measurable, achievable, relevant, and time-bound goals are more likely to be attained eventually.
A good start could be achieving a pre-set profit target, such as 5% monthly. You may also set your goal as keeping your drawdown below a certain threshold or finishing a sponsored challenge within a set time frame.
2. Pick a prop trading approach that is suitable for you
There are many trading approaches out there. Your trading approach should align with your lifestyle and psyche for it to be sustainable. Common styles include:
- Scalping: Quick-moving, high-intensity trades
- Day trading: Making many trades every day without holding any positions overnight.
- Swing trading: Holding positions open for a few days or weeks.
- News trading: To profit from market volatility around the news of economic releases
Be sure to select one based on your availability, risk tolerance, and decision-making style. Moreover, you need to be aware if the prop firm you’re using prohibits any trading style, for example, news trading.
3. Develop a prop trading strategy and plan
After selecting a prop trading style that suits you well, you need to develop a prop trading strategy. A trading strategy will dictate your trade's entry or exit requirements, that is, the price level at which you will open a trade and close off a trade.
Once you’ve set up your prop trading strategy, you should work out the details into a trading plan. A trading plan is a comprehensive blueprint covering everything from your goals, motivation and risk management rules. Having a good trading plan helps you eliminate doubt and uphold discipline.
A good prop trading plan should consist of:
- The condition of your trading market (e.g., ranging, trending)
- Entry requirements (such as breakouts, price action patterns, and indicators)
- Take-profit and stop-loss levels at different market conditions.
- Trade management guidelines (e.g., trailing stop and scaling in or out)
4. Actively manage your risk
Prop firms often implement strict rules, such as maximum drawdown (how much you may lose overall) and daily drawdown (how much you could lose in one day). Besides these limits, accounts which are inactive over a certain period will be breached. You should get familiar with all these rules of the prop firm you’re using and build your risk management plan around these rules.
A good risk management plan should always include these two elements:
- The risk level that each trade should not exceed.
- Clear guidelines for daily loss
Even the best plan may backfire if risk management is not carried out with discipline.
5. Keep an eye on your prop trading transactions
Besides being disciplined to manage your risks, you need to be disciplined to keep track of your every trade through journaling. We all learn from mistakes; good traders are not exempt. Journaling will help you track your progress and provide you with valuable insights into your trading patterns. A typical prop trading journal should include:
- Entry and exit points
- The justification for the trade
- Profit or loss as a result
- Remarks on execution, emotion, or market conditions
Once a week or fortnightly, look through your journal to see patterns in your accomplishments and shortcomings. This will go a long way to help you refine your prop trading strategy and execution over time.
6. Consistency
Prop firms are looking for traders who can make profitable trades repeatedly, within their risk exposure. Consistency is a key criterion for succeeding in prop trading. Sometimes you may be tempted to put in large trades or trade more, especially when you feel you’re on a ‘winning streak’. However, what differentiates a great prop trader from a good prop trader is the ability to be consistent and disciplined in trading. This is why making a plan before you start and being disciplined to stick to the trading plan will help you succeed.
Final Thoughts
The keys to profitable prop trading are having a specific goal that maps out into a structured plan that is diligently followed. Be familiar with the evaluation rules and always manage your risks. In the competitive world of prop trading, sticking to your plan and reviewing it often will increase your chances of success.
Prop trading can be an excellent way for people who want to trade but don't have the money to do it on a large scale to get started. If you do it well, prop trading can be very rewarding as it lets you access funds to trade without risking your own capital. Besides having a good strategy, gaining relevant trading knowledge and technical analysis skills is important for you to develop your prop trading skills.
As the African proverb says, “If you want to go far, go together,” having the motivation to persevere becomes easier when a supportive community surrounds you.
The OANDA Prop Trader Community is the hub for like-minded prop traders of all levels to connect, learn, and succeed together. Whether you want to improve your trading strategies, share insights, or earn rewards, this community is designed for you.
Start trading with confidence today with our community, join the conversation here.
