In this article, we’ll cover the steps on how to develop a technical trading strategy for prop firms.
1. Understand the Prop Firm’s Trading Rules
Every prop firm has specific trading rules that dictate what you can and cannot do. These rules often include maximum daily loss limits, overall drawdown limits, and guidelines on position sizing and leverage.
Example: If a prop firm allows a maximum drawdown of 5%, your strategy needs to include tight risk management measures to ensure that you don’t breach this limit. Suppose the prop firm you’re trading for has a rule that states, “The maximum daily loss cannot exceed 4% of your starting balance.” If your account size is $50,000, your daily loss limit would be $2,000. To comply, your strategy might involve setting a fixed stop-loss level on every trade to ensure you don’t exceed this limit. For instance, if you risk 0.5% per trade, you’d stop trading after four consecutive losing trades.
2. Align with the Prop Firm’s Risk Management Requirements
Prop firms usually have strict risk management requirements to protect their capital. Your strategy should be built with position sizing and stop-loss orders that align with this rule.
Example: A firm may require that you risk no more than 2% of your account on any given trade. If the firm mandates that you cannot risk more than 2% per trade, and your account balance is $25,000, your maximum risk per trade would be $500. Your strategy should incorporate this into your position sizing. For example, if you’re trading EUR/USD and your stop-loss is set 50 pips away, you would calculate your position size so that a 50-pip move equals $500, or 1 lot (100,000 units).
3. Leverage the Firm’s Trading Tools
Many prop firms provide specific tools or platforms for their traders. It’s crucial to develop a strategy that takes full advantage of the resources provided by the firm, such as proprietary trading platforms, advanced charting tools, or real-time news feeds.
Example: Let’s say the firm provides access to a proprietary platform that includes advanced market scanning tools. You could build a strategy that relies on these scanners to identify high-probability trade setups, such as identifying specific candlestick patterns (like bullish engulfing) across multiple currency pairs. For example, the tool might alert you when EUR/USD forms a bullish engulfing pattern, and you enter a long position based on your strategy.
4. Optimize for the Firm’s Profit Targets
Prop firms often have profit targets that traders must reach to move to the next level of funding or to secure payouts. Your strategy should be designed to help you achieve these targets consistently.
Example: If the prop firm has a profit target of 8% within 30 days, and you’re starting with a $50,000 account, you need to make $4,000. Break this down into manageable chunks: that’s $1,000 per week or roughly $200 per day. Your strategy should aim for this daily target, possibly through a combination of smaller, low-risk trades (e.g., aiming for five trades per day, each yielding $40) while maintaining proper risk management to avoid large drawdowns.
5. Tailor Your Strategy to the Firm’s Time Constraints
Some prop firms set specific timeframes in which you must achieve profit targets. If a firm requires you to meet a profit target within 30 days, using a long-term position trading strategy might not be ideal. Instead, you might opt for a day trading or swing trading strategy to meet the time constraints.
Example: If the firm requires you to hit a 5% profit target within 30 days, relying on long-term positions (e.g., trades that last weeks) might be too slow. Instead, you could build a day trading strategy, where you hold trades for a few hours or minutes, looking for intraday opportunities. For example, trading the London and New York overlap, which typically provides more volatility and opportunities to reach your profit target faster.
6. Consider the Prop Firm’s Preferred Trading Instruments
It’s important to focus your strategy on the instruments the firm prefers or allows. If the firm primarily focuses on forex, your strategy should be tailored to currency pairs, taking into account the volatility and trading hours of those pairs. Some firms also allow trading in indices or commodities, so it’s essential to know the scope of assets available.
Example: If the firm specializes in forex trading but allows trading on indices like the S&P 500, you might build a strategy that focuses on currency pairs during the active trading sessions (e.g., EUR/USD during the London session) and indices during overlap periods. For example, you could trade forex pairs in the morning and switch to indices in the afternoon, ensuring you stay active when volatility is highest.
7. Incorporate Flexibility
Your strategy should be flexible enough to adapt to different market conditions. Prop firms typically look for traders who can remain profitable across various market environments, whether it’s trending, ranging, or volatile markets. Your strategy could include a mix of trend-following techniques for trending markets and mean reversion strategies for ranging markets.
Example: Suppose your main strategy is trend following. However, markets occasionally enter ranging periods where trends are unclear. In this case, your strategy should have a backup plan for these conditions, such as switching to a mean reversion strategy when you detect a range-bound market. For instance, you might look for range-bound price action in EUR/GBP, identifying support and resistance levels, and trading bounces off these levels.
8. Balance Aggressiveness with Risk Management
Prop firms typically look for traders who can strike a balance between aggressiveness and risk management. While it’s important to aim for profits, being overly aggressive can lead to breaches of the firm’s risk limits.
Example: A strategy might involve setting ambitious profit targets but also implementing strict stop-losses and position sizing rules to avoid catastrophic losses. If you are targeting aggressive growth, say, doubling your account in six months, you’ll need a strategy with higher risk/reward ratios. However, to avoid breaching the firm’s drawdown limits, you might implement rules such as reducing your position size after a losing streak or stopping trading for the day after hitting a certain percentage loss. For example, after two consecutive losing trades, you cut your position size in half to minimize further losses
9. Match Your Strategy with Your Personal Strengths
While adhering to the firm’s guidelines, it’s crucial to develop a strategy that aligns with your strengths as a trader. If you excel in technical analysis, focus on strategies that leverage that skill; if you’re good at news trading, incorporate that into your plan (be mindful many prop firms now restrict the practice of news trading).
Example: If you’re strong in scalping and the firm allows high-frequency trading, build a strategy around capturing small, frequent profits rather than attempting longer-term trades. If you excel at technical analysis and are skilled at identifying chart patterns, you could build a strategy around pattern recognition. For instance, you might focus on trading breakouts from head-and-shoulders patterns on major currency pairs, setting entry points just above the breakout level and stop-losses just below the pattern’s invalidation point. If you’re less comfortable with fundamentals, you’d avoid strategies that require significant analysis of economic data.
10. Focus on Consistency Over Quick Gains
Aim for steady returns that demonstrate your ability to manage risk and stay profitable in the long term. A consistent strategy might involve targeting smaller, more frequent wins, rather than trying to hit home runs. Consistency shows the firm that you can manage their capital responsibly.
Example: Rather than swinging for a 20% gain in a single trade, focus on achieving smaller, more consistent profits. For example, your strategy might involve capturing 10-15 pips per trade on high-probability setups, trading two or three times a day. Over the course of a month, this could add up to a 5-6% return without taking excessive risks. This consistency will impress the prop firm and demonstrate your reliability as a trader.
11. Take Advantage of the Firm’s Training Resources
Many prop firms offer training and mentorship programs to help traders develop their strategies. Make use of these resources to refine your strategy and learn from more experienced traders.
Example: If the firm offers webinars on risk management or strategy development, attend these sessions to gather insights that can improve your trading. For instance, if the webinar covers trading in highly volatile markets, you might adapt your strategy to include wider stop-losses during news events or use tighter take-profits when volatility spikes. Incorporating these teachings can help you stay adaptable and improve your overall trading performance.
12. Develop a Plan for Scaling Up
Your strategy should include a plan for scaling up, such as increasing position sizes or taking on more trades as your account balance grows. If you started with $50,000 and get bumped up to $100,000, your strategy should scale accordingly.
Example: If you were risking $500 per trade on a $50,000 account, you can now risk $1,000 per trade on the $100,000 account, maintaining the same risk management principles while increasing your potential returns
13. Monitor and Adapt to the Firm’s Evaluation Process
Prop firms often have evaluation processes, such as trial periods or phases, where your performance is closely monitored. Your strategy should be adaptive to ensure you pass these evaluations.
Example: If the firm’s evaluation process has two phases—Phase 1 with a 10% profit target and a 5% maximum drawdown, and Phase 2 with a lower 5% profit target but stricter drawdown limits—your strategy should adjust accordingly. In Phase 1, you might focus on higher-risk/reward trades to hit the target quickly, while in Phase 2, you might switch to a more conservative approach, such as trading only the highest-probability setups and reducing your risk per trade.By using these more practical and specific examples, you can better align your trading strategy with the particular requirements of the prop firm, ensuring that your approach is tailored to both your personal strengths and the firm’s expectations.
See our guide to Beating Prop Firm Evaluation Programs.
