The first step into the world of proprietary trading firms is equally bewildering and thrilling, as it would be for any trader. The same also applies if you are participating in Forex or day trading within prop firms. Even though the experience can be fulfilling, at times it can be exhausting. However, most novice traders seem to ignore some simple principles that would help them smartly compete within these firms. Being aware of these mistakes and how to avoid them is vital for constructing a successful long-term trading career.
In this piece, we will look at the most common mistakes that novice traders make while trying to operate in a prop firm and offer some corrective measures with respect to the same.
Overemphasis of Winning Ratios
New traders often make the mistake of assuming that winning often is the most important factor to attaining success in trading. Many beginner traders become obsessed with trying to save their trades and attempt to achieve upper win ratio benchmarks which usually are 70% or above, out of a false assumption that profits would scale to the number of wins, the ratio they achieve. However, prop trading and Forex trading is not as straightforward as winning on each and every trade.
An unbalanced risk and reward ratio can make winning seem misleadingly easy. Always remember that profitability relies heavily on the balance of the risk undertaken and the anticipated reward. Even if a trader wins less frequently, they can still be profitable if their winning trades offer a higher return than their losses. An example would be, if you are willing to lose 20 pips while gaining 50 pips, then having a lower win rate is perfectly acceptable as you will still profit in the long run.
Chasing wins can drive profitability, which is often the downfall of most retail traders. In proprietary trading firms, where capital preservation and consistency is the name of the game, there has to be a healthy balance in the win rate and risk management. Fixating on winning every single trade is never the answer.
Overlooking Risk Mitigation
Risk management is critical to trading, yet it remains the most ignored part, especially for new traders. In Forex as well as day trading in prop firms, not mitigating risk properly can incur significant losses out of which retrieval may not be realistic.
Traders new to the market tend to utilize excessive leverage in hopes of making a profit without taking into account the possible losses that could occur. A stop-loss order having a small distance from a trade is frequently utilized which later causes a loss that exceeds the desired value once the market opens against them. In prop firms where trading for the day is capped or restricted, needless risk taking could lead to failure at an evaluation or challenge phase regardless of the robustness of the strategy the trader employs.
Risk management entails determining the size of the position to be taken while taking into regard the relevant capital available for trading, the stop-loss as well as the level at which too much risk is taken. These rational steps are often overlooked by new traders which later leads to soaring losses that will make their overall progress within the firm to stagnate.
Disregarding the Emotional Side of Trading
The psychological side of forex trading and especially with prop firms is one that is deemed the most challenging. Trading in its entirety is an entire cycle of emotions especially factoring profits and losses within the value of capital. The pressure that new traders face in real time decision making within a market is often underestimated.
One mistake is allowing emotions like fear or greed to influence trading decisions. They may suffer from a form of fear known as “straitjacket trading” where they chase trades absent from their plans, while greed might compel them to over-leverage their positions or forget stop losses altogether. Either feeling can obstruct one’s judgment leading to decisions that are detrimental to their overall performance or worse, risk damaging the trader’s wreckage.
The same is true for traders working in prop firms. They need to build discipline and resistance with emotions, especially if the person is experiencing some losses. Having a clear mental structure and controlling feelings is equally vital as having a good plan to tackle the market. Undoubtedly many budding traders fail to appreciate the role that emotions play in the result of their trading.
Another frequent mistake newly prop firm traders tend to make is not having trading plans. Most take a shot at the market with blurry or vague loose objectives but forget to thoroughly plan for their endeavors. A plan should candidly detail entry/exit level, risk control measures, revenue instruments and the types of markets that will be traded.
A trader without a clear plan is often more reactive and likely to make irrational decisions in response to the market. Such behavior can yield erratic financial results, inconsistency, and in some cases, unwarranted losses. When dealing with prop firms, this can be counter productive as they have very rigid parameters of meeting certain profit thresholds alongside a well-defined disciplined approach to trading.
A trader in a Prop Firm must always achieve set targets in order to sustain his position. This can only be achieved by consistently adhering to a predetermined trading plan. Fresh traders often operate under the illusion of being able to improvise or “wing it”, which more often than not leads to ill informed decisions which do not satisfy the objectives of the firm.
Not Changing Strategies With Changes in the Market
Another mistake frequently made is the failure to change one’s strategies with changes in the market. The market is constantly changing and evolving, which means what works at a certain time may not work another. Working in Forex and dealing with prop firms requires that the trader remains flexible and adjust to the shifts in volatility, market trends, and any news events.
Newer traders, and those fresh from prop firms, tend to depend too much on a single strategy, expecting it to work under all circumstances.
The most effective traders are those who spend their entire time rethinking market conditions and adjusting their strategies accordingly.
Resistance to Patience and Mistaken Beliefs in the Possibility of Easily Gaining Profits
A large portion of new traders or beginner traders are entering into Forex trading or day trading under prop firms with expectations that are extremely unrealistic. The trade-off of patience seeking large sums of money can lead to impulsive decisions and actions taken. This desire often translates to the attempt of over-trading, forcing trades when conditions are not ideal, along with ignoring too much risk.
Establishing success with a prop firm takes considerable work. Novice traders should remember that working the market is not for sprinters. It calls for patience, discipline, and plenty of sustained effort. Traders who are more likely to succeed over time are those who set realistic goals, control their hopes, and direct their energies to achieving gradual change.
Conclusion
While trading in prop firms comes with amazing benefits, it also has its set of downsides. New traders frequently make costly errors, such as placing excessive weight on the importance of a high win rate, lacking sufficient risk controls, ignoring the psychology of the market, and failing to adhere to a clearly laid out trading plan. These errors can be very costly, especially for day traders who engage in Forex trading in prop firms that have strict operational dos and don’ts and performance expectations.
Avoiding these pitfalls not only improves new traders’ performance but also their chances of trading successfully prop firms. Focused attention on effective risk management, emotional self-discipline, and flexibility to adapt to current market conditions will enable traders to survive and thrive in competitive prop firms long enough to build a successful trading career.
