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Prop Firm Forex Trading Strategies: The RoadMap to Success

Imagine you are driving to the airport to catch a flight. You know the way – more or less – so you decide not to use Google Maps or any GPS navigation. Why use a map when you can use your gut and memory? For the first part it is fine – and more fun not depending on anything else to get you there. You ace the turns and feel reassured by each familiar landmark you pass en route. Then it starts to go wrong. You get a funny feeling that you are way off course... you have missed the exit from the highway and now you could miss your flight! There is a lot riding on that plane – not just the price of your ticket, but the money and time that you have invested in the business trip and from the deals that you could sign thanks to the scheduled meetings.

This is trading without a strategy. Fun at first – and hey, maybe you’ll get it right some of the time and hit some winning trades as you navigate the market by instinct alone. This approach is unsustainable in the long term, however, and traders looking for long-term, sustained success will heighten their chances by developing – and sticking to – a decent strategy.

Hope is [a] bogus emotion that only costs you money.

Jim Cramer

When it comes to prop trading there are several strategies worth considering. In this article we will guide you through the maze of options, highlighting some of the most popular prop trading strategies before diving in and explaining several in step-by-step detail. Bear in mind, however, that there is no single “right” approach or “wins every time” strategy. The best strategy for you will depend on your unique trading personality, appetite for risk, and prop firm of choice. Exploring your options is an excellent way to get a grounding in the general approaches used and find the most promising prop trading strategy for you as a unique trader.

Prop Trading – What are we talking about?

If you are already lost at “prop trading” then we need to take a quick segway back to the drawing board. Prop trading, or “proprietary trading” is a new and increasingly popular industry whereby undercapitalized traders are funded with company capital in return for shared profits. Funded traders can access up to millions in leverage to trade across diverse markets. The average profit-share is 80/20 with the trader keeping the majority of any winnings and the prop firm assuming the hit of any losses. In return for this arrangement, traders need to be able to demonstrate their ability to make consistent profits without taking on excessive risk.

Prop firms tend to evaluate traders using a test or series of internal evaluations or “Challenges.” During a typical prop firm challenge, traders will pay to access a company account (fees increase with account size) and then must trade within certain parameters. These will vary from firm to firm but include hitting regular profit targets, keeping losses below the preset maximum, and often doing all the above over a time limit. Prop firms vary in flexibility on strategies, the use of expert advisors, and tradeable assets, and increasingly many are removing the Challenge deadline.

Overall, prop trading is a fantastic funding opportunity for ambitious traders looking to fast-track their careers. The stakes are high, the competition is stiff, and strategies are the cornerstone for triumph. From astute algorithms to daring methodologies, prop traders must harness a unique set of tools to navigate the turbulent waters of trading. In this article, we will walk you into the realm of prop trading strategies, unveiling the hidden gems that separate the winners from the rest.

Prop Trading Strategies Overview

Research is King when it comes to trading, and you have possibly already done some reading around which brought you to this article. Strategy terms are often bandied about without explanation, so before we talk you through some of the tried-and-tested approaches used by prop traders, let us define these terms:

Swing Trading

Swing traders capitalize on short to medium-term price movements within an established trend. The idea is to identify and trade the swings in price that occur between support and resistance levels. Trades are usually held for a few days to a few weeks. In our recent guide to the Best Prop Firm for Swing Traders we do provide a list of prop firms with rules that enable swing traders to obtain or keep a funded trading account.

News Trading

News traders will open positions based on the impact of news and economic releases on the market. This strategy is based on the monitoring of economic data such as financial reports, economic headlines, job reports, etc., and traders will predict how these will influence market sentiment and prices and trade accordingly. Are you a News trader seeking a prop firm that understands and supports your trading style? Look no further! We have just released our comprehensive guide to the Best Prop Firm allowing news trading.

Trend Following

The clue is in the name! Traders using this strategy will follow the trends in the market and seek to buy when the price is trending upwards and sell when it is heading down. The idea behind trend following is to ride the trend wave for as long as possible.

Scalping

An intense and high-pressure strategy, scalping is not for the faint-hearted. Traders will execute a high number of very short-term traders to profit from the small price movements. Scalpers enter and exit trades as fast as within seconds and might find themselves buying and selling hundreds of trades a day. Scalping relies on tight bid-ask spreads to generate profits.

Breakout Trading

Breakout traders will hone in on price levels at which the market breaks out of a consolidation or trading range. Traders using this strategy are trying to profit from the increased volatility and momentum that often follow a breakout: buying when the price breaks above resistance or selling when it breaks below support.

Now that we have covered the most popular strategies used in prop trading, let us dig a little deeper and explain some working strategies used by prop traders to win Challenges. The names of traders may be new, but these strategies are tried-and-tested winners in the prop trading realm.

Example One: Bob uses an ICT Strategy

After purchasing his first challenge, Bob decides to focus on the ICT (Inner Circle Trader) strategy. Bob explains there are four key components to this strategy. This is how Bob did it:

  • Timeframe and Pair Selection: Bob traded between the period of 5:30 AM to 5:30 PM UK time. He informed his decision by checking high-impact news events, focusing on Forex pairs like EUR/USD.
  • Indicators: Bob used ICT tools, such as the Asian Session Range indicator, to help him identify specific price ranges.
  • Risk Management: Proper risk management is always important in trading, but for prop trading, failing to monitor risk could result in instant failure. Bob starts with a smaller risk per trade (0.5%) until he hits a profit of 3-4%, then he ups his risk to 1% per trade. This is a common risk management approach among prop traders.
  • Execution: Bob explains that he opens trades by analyzing higher time frame market structures, waiting for price sweeps and retests, using a one-minute time frame for entry confirmation, and aiming for previous liquidity levels as profit targets.

Overall, Bob’s ICT strategy is based on analyzing market structures, using specific indicators, implementing risk management techniques, and executing trades based on price sweeps and retests. Depending on the prop firm and trader in general, this could be a successful approach to passing a Challenge.

Example Two: Becca uses Position Sizing

  • Account Size and Drawdown: Becca starts off by assessing the size of the funded account she has chosen and what this means for any potential drawdown. This ratio will help her understand the actual risk amount.
  • Calculate Trades: Using a table to calculate the risk based on drawdown, Becca determines the maximum number of losing trades that would be required to close the account. With this information, she finds a "sweet spot" with a range of 10 to 20 consecutive losses.
  • Set Risk-Reward Ratio: Remember the importance of a consistent risk-reward ratio. In Becca’s case, a 2:1 ratio means risking $1 to potentially gain $2. This ratio allows for profitability even with a win rate of 34%.
  • Determine Position Size: Becca selects her micro contracts using a position size calculator. She creates brackets for different stop sizes and tweaks the number of contracts accordingly.
  • Conduct Backtesting: Never underestimate the value of backtesting! Becca carries out backtesting to understand the risk-reward dynamics of her strategy. She analyzes the historical data to evaluate how the strategy will perform under a variety of market conditions.
  • Maintain Consistency: Many prop firms require traders to adhere to the “Consistency Rule.” In Becca’s case, she maintains consistency by staying close to the set risk parameters and position sizing in every trade.

As prop trading strategies go, Becca has chosen a reliable and effective approach. This strategy focuses on account risk management, consistent position sizing, and the use of a set risk-reward ratio. For truly long-term profitability and longevity with any prop firm, remember to keep backtesting and maintaining discipline.

Example Three: Bilal uses Trend Identification

Bilal’s strategy uses time frames to identify price shifts and profit-generating trends and apply the knowledge to buying and selling assets. In Bilal’s case, he uses currency pairs, but this strategy can be equally effective when applied to other instruments.

  • Timeframe: Bilal singles out the higher period autoflow or trend. He then decides if the market is bullish or bearish on the higher time frame (he chooses the four-hour time frame).
  • Autoblocks: Based on the direction of the autoflow, Bilal marks out auto blocks near the price action. If the price flow is bullish, mark auto blocks below. If the autoflow is bearish, mark them above the action.
  • Price Mitigation: Patience is everything with this strategy. Bilal waits for the price to mitigate the autoblocks. The price needs to interact with the marked autoblocks.
  • Determine Entry Points: Bilal uses the 15-minute time frame to pinpoint entries. For this strategy, the ability to recognize "Kill Zone" hours is critical. “Kill Zone” hours are specified as 2 am, 6 am, 7 am, and 11:30 am New York time. As Bilal demonstrates, it is advised to take entries from the autoblocks using these hours and aim for a risk-reward ratio of 1:2.
  • “Kill Zone” Hours: When a market structure shift occurs within the autoblocks on the 15-minute time frame, it serves as an entry opportunity and Bilal acts accordingly.
  • Risk Management: Bilal aims for a risk-to-reward ratio of 1:2. He sets his take profit (TP) level at a distance twice the size of his stop loss (SL). For example, if your SL is 10 pips, target a 20-pip TP. Bilal places his stop loss below the autoblock (for bullish entries) or above the autoblock (for bearish entries). This helps him limit potential losses if the trade goes against him.
  • Repeat: Now it has been tried and tested, Bilal repeats this process for other currency pairs (you could do the same for different instruments.) Like Becca, Bilal continues to backtest his strategy under different market conditions to assess its effectiveness and profitability in various scenarios.

Bilal uses this strategy successfully to win Prop Challenges. This approach could be duplicated for other currency pairs or different markets altogether. Simply apply the prop trading strategy by following the same steps of identifying autoflow, marking auto blocks, waiting for price mitigation, looking for market structure shifts, and taking entries from the autoblocks.

Conclusion

Developing Winning Prop Trading Strategy

A winning Forex Prop Trading strategy considers factors such as risk tolerance, market analysis, and entry, and exit points, and leverages the assets made available by the prop firm. As a funded trader, you must empower yourself through resources and market data to make informed trading decisions, identify favorable opportunities, and protect yourself from potential pitfalls.

Remember, whether you are driving to the airport or trading the markets, speed bumps are inevitable. But with a reliable and effective prop trading strategy in hand, you will have the power to adjust your course, whether this is grabbing the wheel just in time to avoid a loss or speeding up to take a profit. Trading with a strategy allows you to keep your eyes on the prize – whether this be the promised funding or your personal profit goals and career roadmap.

So, just as you would not head to an unknown airport without a map, approach trading with a well-defined strategy. Whether you choose one of the above approaches or formulate your own strategy for success, trading with discipline and forethought will unlock the many opportunities offered by prop firms and help you navigate the ever-changing landscape of the financial markets."

FAQs on Prop Trading Strategies

What are prop trading firms?
Proprietary trading firms, often referred to as “prop firms” are exploding in popularity as a way for traders to seek near-instant funding at a corporate level. Prop firms offer the use of company capital – sometimes up to millions in funding – to traders who can demonstrate their profit potential and ability to trade within risk parameters.
How do prop firms choose which traders to fund?
Prop firms evaluate the reliability and investment worthiness of traders through an internal trading test or series of evaluations. Traders must demonstrate their ability to meet profit targets without taking on excessive risk, sometimes within a certain time frame. Once they have successfully proved themselves, they will move onto the funding phase and be able to retain a cut in any profits earned.
What are the best prop trading strategies?
While there is no single “best” strategy that will guarantee success in a prop trading challenge, traders may guide themselves with a few considerations. Firstly, research the diverse style and strategies which have proved successful for fellow traders in a prop firm scenario. Secondly, backtesting and practicing in a demo account before plunging for a paid challenge. Thirdly, remember that just as important as the strategy itself, is the mindset and trading discipline needed to earn consistent profits and curb inordinate risk.

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Posted by
George Milios

George Milios

Lead Generation & Business Growth Specialist

Helping Companies Scale their Organic Traffic & Conversions over the long-term by implementing strategies that work. In addition, George is an avid cryptocurrency researcher, advisor, investor, and trader.

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