There are valid reasons why a trader could lose a prop firm account. Some traders may view these reasons as invalid or excuses, but the reason I view them as valid is because for the most part they are genuine.
In the past 3-4 years, prop firms have become more popular than Agege bread, and their popularity amongst traders has continuously raised the bar for emerging prop firms. While this is a huge plus to all retail traders, statistics show that prop firms with 2 challenge phases have less than 5% of traders who make it to the first payout phase.
Statistics also show that a fair percentage of traders who fail their prop firm challenge are not beginner traders, and this is the reason we will be looking at four valid reasons why the failure rate in prop firm challenges are abysmally high:
1. Vague rules:
Recently I took up one of these challenges myself after going through a certain prop firm’s rules, I thought I understood all their guidelines until I was cut off from their challenge during the second phase (verification phase).
I had a -2.8% drawdown as against their -5% drawdown, but what counted against me was that their drawdown in the verification phase was relative, and not absolute.
Meaning if you make profits in the second phase, and lose the profits you made, it will be counted against you even if the initial capital given to you was still intact. This rule was never explained in their literature, all the prop firm emphasised was the -5% drawdown.
Irrespective of how good you may be as a trader, hidden rules like this could sabotage your effort to get a prop firm account, so it’s important you do a proper research and enquiries with the customer care personnel before taking any challenge.
2. Time Limit:
More than 80% of the top prop firms require you to hit a certain return on investment within 30 days.
Is this possible a 100% of the time?
To be realistic, it’s impossible for most professional traders to hit a particular ROI each and every month. This has nothing to do with how skillful you are but what the market presents to you.
If the market favours you with most of your setups playing out the way you anticipated them to, you could hit your prop firm target in a matter of days or less than 2 weeks, but if the market does not give you good setups, and the few that come your way are fakeys, you are doomed for failure.
A handful of prop firms recognize this fact, hence they encourage traders by giving them as much as six months to one year to complete their verification phase (just one phase). In recent times some popular prop firms have also adopted this idea, and they have implemented it in the form of extending a challenge or verification phase if a trader is in profits but finds it difficult to hit their target.
This makes it paramount, that any trader who’s intentions is to get a prop firm account with minimum trials needs to look out for firms that has a time friendly rule.
3. Bitting off more than you can chew:
Many traders including myself would love to get a huge prop firm account for a start
Why not?
Once you pass the challenges, and you become a prop firm trader, a 5% profit off a $200,000.00 account is equal to $10,000.00. if you earn 80% of that after the profit split, you will be making $8,000.00 after a good month of trading. Imagine your bargaining power with $8,000.00 in your wallet.
This way of thinking lures most traders into a trap. The trap of spending their last penny to get a huge prop firm account and putting themselves under the psychological pressure of not failing their challenge because they literary broke their piggy bank to invest on a prop firm account.
The pressure starts affecting their decision making in the market, and the time constraint rule adds to the duress. Most traders end up losing such accounts before they get to the first payout phase, and they get financially stranded because they no longer have money to take another challenge.
Since we know that every month won’t be profitable in the market, it’s important we split the money we want to invest into getting a prop firm account into three parts. This will ensure that we can attempt the challenge three times before our savings are depleted. This significantly increases your odds of passing the prop firm challenge.
Another perk using this method is: Once you get a small account with any prop firm, you can decide to use the profits gotten from that account to purchase a bigger account. By so doing you are no longer investing your capital to obtain a larger prop firm account, but investing the profits made through your prop firm account.
4. Taming a contrarian:
A contrarian is a trader who trades contrary to popular beliefs and is consistently profitable.
Imagine if a trader who has mastered the art of flipping accounts tries to pass a prop firm challenge…
In most cases, such a trader will fail, especially if that trader is not used to trading any other way. The reason for this is simple. All the guidelines behind passing any prop firm challenge will look and sound alien to a contrarian trader.
For this reason it’s important a contrarian trader goes through the rules of any prop firm, understands them, and then practice using those rules on a demo or live account as a guideline.
Only when such a trader is comfortable with the rules of a prop firm account should he or she attempt to go through the challenges a prop firm presents
In conclusion:
It’s an interesting time to live in as a retail trader, for the first time in history of retail trading, firms are willing to sponsor your dreams in as much as you have what it takes to pass their tests.
I wish each and every one of us all the best as we attempt to challenge the next phase of our trading career.
NOTE:
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