Many traders embark on their journey with proprietary trading firms, enticed by the prospects of leveraging large capital pools. However, what often goes unnoticed are the intricate, unspoken rules embedded within the terms & conditions of these firms. These rules, if overlooked, can lead to the termination of trading evaluations or even the loss of funded accounts. This article delves into these critical but frequently hidden regulations to guide traders in navigating the complex landscape of proprietary trading successfully.
Prohibited Trading Strategies
Initially, it’s crucial to recognize the trading strategies and practices universally prohibited by proprietary trading firms. These include:
- High-frequency trading
- Ultra-fast scalping
- Latency arbitrage trading
- Tick scalping strategies
- Reverse arbitrage trading
- Hedge arbitrage trading
- Hedging across different accounts
Understanding and avoiding these strategies is the first step in aligning with a proprietary trading firm’s guidelines.
Additional Critical Regulations
Beyond the general trading restrictions, proprietary trading firms enforce several other lesser-known rules that are essential for traders to adhere to:
1. Maximum Lot Size Limit
This rule caps the maximum lot size traders can use, based either on their account balance or specific trading instruments, to manage risk exposure effectively.
2. Risk Per Position Rule
It specifies the maximum percentage of the account that can be risked on a single trade, ensuring traders do not overexpose themselves to risk.
3. Mandatory Stop-Loss Rule
Requiring a stop-loss for each trade helps in limiting potential losses and is a compulsory measure across many firms.
4. Consistency Rule
Traders are expected to maintain a consistent trading approach, utilizing similar risk levels and lot sizes, reflecting stability in their trading strategy.
5. Maximum Open Positions
This limitation dictates the number of concurrent positions a trader can have, either overall or per instrument, to prevent excessive exposure.
6. Minimum Open Trade Time
Defines the minimum duration a trade must remain open, deterring practices like scalping that involve extremely short holding periods.
7. Consistent Trading During Evaluation
Even after reaching profit targets early in an evaluation period, traders must continue employing their original strategies without drastically reducing risk.
8. Risk Desk Team Evaluation
Upon completing an evaluation, a firm’s risk team may assess a trader’s strategy compatibility with the firm’s trading philosophy, which can influence the decision to allocate funding.
9. Prohibition of Gambling Mentality
Traders must demonstrate discipline and adhere to their trading strategies rather than risking excessive portions of the account to achieve targets rapidly.
10. Martingale Strategy Limitations
Due to its high-risk nature, doubling down on losing positions while halving winning bets is generally discouraged or outright banned.
11. Grid System Restrictions
Automated trading that involves placing multiple orders at set intervals around the current market price is often prohibited to manage risk effectively.
12. Hedging Restrictions
Simultaneous opposing trades to mitigate risk can lead to increased exposure due to spreads and market gaps, thus being typically disallowed.
13. EA Authorship Requirements
While automated trading robots are permitted, proprietary firms usually require that traders are the original authors of the EA, restricting the use of third-party EAs.
14. Trade Copier Conditions
Trade copiers are allowed under the condition that trades are copied from one’s master account rather than from external signal providers, to avoid undue risk exposure.
By familiarizing themselves with these detailed but critical regulations, traders can better navigate the challenges of proprietary trading and enhance their chances of success.
