Risk management is the foundation of success in prop trading. Whether you're trading with a funded account or completing a challenge, your ability to manage risk can make or break your career. In this article, we share proven risk management tips every prop trader should follow, helping you stay consistent, avoid hard breaches, and grow your profits.
Prop trading gives traders a great chance to scale up and benefit with a lower risk to their own capital. However, with this opportunity, you also have a responsibility to follow the prop firm’s rules to avoid breaching and losing your account. If you’re new to prop trading, refer to our previous article “An introduction to proprietary trading” to learn more.
This article will discuss the appropriate risk controls that most successful traders deploy.
Why risk management is essential
Prop trading follows tight guidelines on drawdown, daily losses, and consistency. This is unlike when you are trading with your own money. If you do not manage your risks well, you will exceed these constraints very quickly and infringe the rules, even if you win in the short term. Risk management is, therefore, not a want but a need if you desire long-term success in prop trading.
Here's how to trade well, stay in the game, and increase your prospects of long-term success:
1. Know your daily and maximum drawdown limits
Every prop trading firm sets two primary limits: maximum drawdown (how much you may lose overall) and daily drawdown (how much you could lose in one day). Know these figures like the back of your hand. After every trading session, always find out how close you are to the boundaries. Should you reach 50% of your daily loss limit at any point in time, stop trading for the day.
2 Risk 1% or less per trade
Prop firms value consistency rather than big wins that are inconsistent. As a rule of thumb, refrain from risking more than one percent of your account for each trade. Many elite prop traders run only 0.25% to 0.5%. A smaller risk means more buffer to recover should the markets go against you.
3. Keep a consistent lot size
If you’re on a winning streak, try to steer clear of the temptation to overtrade. Maintain stable relative position sizes with respect to your stop loss. This keeps your performance consistent and helps guard your account against emotional choices.
4. Apply a stop loss.
If you’re not applying stop loss in your prop trading, your prop trading could be a ticking time bomb. Every trade should have an obvious point of exit to help control loss. Learn to place stop loss based on your strategy, not your emotions. Once you’ve placed your stop loss, avoid moving it wider to "give the trade more room” as this may very well lead towards a breach.
5. Choose quality over quantity.
Prop trading is about quality trades, not just about trading volume or quantity. Many prop traders fail when they trade too frequently. Focus on high-probability trade set-ups that are consistent with your strategy. On the other hand, you do need to balance waiting to trade with inactivity days. In OANDA Prop Trader, we have an inactivity day of up to 30 days, which means you have more time and less stress to trade on your terms. You may check out the rules and conditions of our Challenges here.
6. Track your trades and review performance.
Keeping a trading journal for your prop trading will help you track your performance. Document your entries, exits, reasoning, and results in the journal. This will help you spot trends, fix errors, and sharpen your decision-making. Prop trading firms value traders who can learn from their mistakes, improve and adapt to the changing market conditions and rules.
Final thoughts
If trading is a zero-sum game, prop trading is a performance sport in which consistency is a critical trait. You need consistency to avoid breaching or losing your account, and sound risk management is key to staying consistent in prop trading. If you want to remain funded and scale your account, managing your downside is just as (if not more) important as chasing upside. By following these tips, you’ll develop the consistency and discipline that prop firms look for in top traders.
Whether you’re new or experienced, gaining relevant trading knowledge and technical analysis skills are essential for you to be able to develop your risk management and prop trading strategies. Besides knowledge, you’ll find value and support within a community of like-minded traders. The OANDA Prop Trader Community is the hub for 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.
Do yourself a favour, start trading smarter today with our community, join the conversation here.
