Common Rule Violations

Key Highlights

Passing your evaluation and getting access to a funded account isn’t all about your skills. It’s about learning the rules and adhering to them.

The following is a look at everything you need to know to pass:

• Prop firms require their traders to hit a profit target of between 5% and 10% on their opening balance. 
• Each firm will have a list of banned strategies – These are strategies that you should use to trade when there’s a major event coming up.
• Companies use drawdown limits to cap daily losses. The nature of the drawdown limits varies, but their violation leads to one result: account closure. Dive deeper into this topic Drawdown in Prop Trading
• The firms will have a set number of minimum trading days to confirm that the profits achieved are due to consistency and not blind luck. 

Common Rule Violations

Believe it or not, but most failures in prop firm trading challenges are rule-based. I can clearly remember the very first time I heard about the 85% failure rate. And yes, you read that right! That’s the number of skilled traders who fail these challenges.

When I first came across this statistic, I was skeptical and adamant that there was no way the failure rate due to common prop trading rule violations would be that high. And then the unimaginable (according to me) happened.

I failed my first evaluation, and suddenly this number started to resonate with me.

Here’s one thing that many traders will not tell you – the most common prop trading mistakes are preventable. Once you understand what they’re, it’s possible to do something about them. Read on to learn about the common rule violations and what you can do to avoid each. 

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Audacity Capital Empowering Traders Since 2012

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Top Rule Violations

As a prop trader, you can have the best thought-out trading strategy imaginable, but if you violate any of the rules discussed below, the prop challenge ends. And the truth is that these aren’t based on advanced trading concepts, but are, in fact, simple, emotional mistakes.

Join us below as we discuss the top rule violations to help you get answers to the question, ‘Why traders fail prop challenges.’

1. Over-Risking

Over-risking or stacking trades is a silent account killer and is a rule violation that happens without many traders even realizing it. Often, this comes about when a trader opens too many positions pointed in one direction at the same time. 

By opening these positions, you’re effectively adding to your total risk without taking your limits into account. The reason these happen is that when a trader sees a strong trend, they’re tempted to argue that, ‘if this trade is good, then two or more will be better.’

The best way to avoid violating this rule is:

• Check correlation: If you have chosen to trade multiple pairs, confirm that they aren’t moving together. 
• Stick to the principle of one idea, one trade: Regardless of how bullish you think you’re, always make sure you don’t overlook your risk per trade.
• Stop pyramiding in prop evaluations: Scaling into positions is best suited for funded accounts that have a profit cushion, and not for prop evaluations that have strict limits. 

Here’s a detailed explanation about static drawdown vs trailing drawdown

2. Revenge Trading

Revenge trading is something that has destroyed the careers of many skilled traders. What happens is that the minute you take a loss, you immediately develop an urge to get it all back. The result: you find yourself jumping to open another trade position without thinking it through.

This leads to another loss and another new position. And before you know it, the 2% loss you incurred earlier has now turned into something bigger, causing your evaluation to end. The good news is that you can avoid revenge trading by doing the following:

• Setting a three-strike rule: Here, it means you must stop trading after incurring three losses in one day. 
• Resist the urge to increase an existing position after incurring a loss: Instead of increasing the positions already open, do the reverse and reduce them. 
• Close the platform and walk away: Take a break from your trading desk and go for a walk. This allows you to live to trade another day. 

To learn more about revenge trading and its implications, make sure to check out our guide on Prop Trading Risk Rules. 

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3. Ignoring Daily Loss Limits

Daily loss limits are a set of important rules that help set the amount of capital your trading account can lose on a single trading day. Failure to observe this limit will lead to the account becoming locked and, thus, unable to trade for the remainder of the day. 

Each prop firm will have a different limit, but many of these range between 3% and 5% of the opening balance. Please be advised that these daily loss limits are designed to reset when the market rolls over.

To guarantee that you’ll stay within your daily limit, make sure to keep an eye on your equity throughout the trading day. While doing so, remember to factor in swaps and commissions, including possible slippage when deciding on an exit point. 

Dive deeper into this topic daily vs intraday drawdown

4. Trading During Restricted Times

Time pressure is something many of us have faced when trading. At first glance, 30 days sounds like enough time to undertake a challenge without breaking any rules. But as so many traders have come to realize, this is often easier said than done.

Panic is bound to set in when you realize that the time allocated by the prop trading firm is fast running out. At this point, you’re likely to start taking steps that you know all too well are not good just because you have realized that time is running out.

The problem with such a move is that it will lead you into trading during restricted times and on restricted events. Once the futures prop trading firms notice what you’re doing, they’ll have no option but to close your account.

You can avoid this by creating a daily trading journal and making sure to show up each day. 

Read our complete guide on this topic Daily vs Max Drawdown

Why These Mistakes Happen

Many first-time traders begin their evaluations with the mentality that risk management is boring. This leads them to believe that risk management only comprises the basic stuff: things that people already know. This approach is wrong and is the leading reason for failure. 

Common risk management failures include:

• Taking oversized positions
• Ignoring correlation
• Inadequate stop-loss orders
• Martingale tendencies 

Understand this better here Fixed vs Trailing Drawdown

Trading Competition

Free Prop Firm Challenge

Trading Competition

Free Prop Firm Challenge

Discipline vs Profit Mindset

Now that you have an idea of what goes wrong, it’s time to talk about what those who pass these evaluations do right. In a nutshell, some of the strategies practiced by successful traders include:

• Taking conservative risk per trade
• Treating the evaluation funds like real money
• Going for quality instead of quantity
• Understanding the importance of pre-trade preparation
• Learning to protect profits early on 

Conclusion

Crypto prop trading firms’ challenges can be a game and life changer to skilled traders. This is because they provide a chance to trade large amounts of capital without risking personal finances. The downside is that they aren’t easy, which makes them ideal for patient traders.

To pass the Audacity Capital prop trading evaluation, you’ll need to stop the urge to be flashy and instead focus on following your trading plan. You must remember that the goal is to learn how disciplined traders pass challenges and become funded. 

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