Prop firms have gained popularity in the last few years due to the opportunity for retail traders to increase their potential returns. However, like any other industry, prop trading has its dark side. Most times, you will only read about the bright side. It is important also to know the things few people talk about. This way, you will be prepared for the good and the bad before starting your journey.
TIME PRESSURE
One negative thing about prop firms is the pressure to complete challenges and evaluations in a given period. Trading with the pressure of achieving a specific target in a month can affect the performance of a trader. It becomes more difficult to stick to your strategy rules. Therefore, most traders become impulsive and assume a gambling mindset in order to achieve the target.
Consequently, some professional traders end up failing the challenges due to this pressure. This can be costly, given you have to buy each challenge. Moreover, it can demoralise a trader. However, most stock prop firms are slowly shifting from this and are giving traders unlimited time to achieve their targets.
STRICT RISK MANAGEMENT RULES
Stock prop firms give traders access to huge amounts of capital. However, the capital comes with strict risk management rules that force some traders to conform to a very conservative style of trading. Although these rules are meant to protect the firm from losses, they can sometimes feel like prison bars for traders.
Some risk management rules include a maximum daily loss, a maximum loss and a mandatory stop loss. A maximum daily loss limits how many positions a trader can take in a day. Moreover, it limits how much you can risk per trade. For instance, if you have a maximum daily loss of $100 and you risk $50 per trade, you can only take two positions in a day. Therefore, if the first two trading opportunities end in losses, you miss out on any great trading opportunities after that.
Meanwhile, the maximum loss will control your position sizing. With a maximum loss, you have to ensure that a losing streak will not make you violate the limit. Moreover, it limits how much you can make per trade. With small lot sizes, your losses and profits are small. This can make it harder to hit the target on time. Even if you have unlimited time, it can take so long that you lose the motivation to hit your target.
Meanwhile, a mandatory stop-loss rule can be easy to forget. Every now and then, you might get a great entry opportunity. In the excitement, it is easy to open a position without a stop loss. Therefore, you can lose the account despite being a profitable trader.
TECHNICAL ISSUES
Technical issues arise whenever you are using a platform. However, with a prop firm, these issues can cost you an account. Sudden crashes in the technology can mean late execution of orders. Therefore, stop losses and take profit orders can fail.
In the case of a stop loss order, a technical failure could magnify your losses, causing you to violate a rule like the maximum daily loss. Other issues can include poor quotes that do not reflect real market conditions. In this case, you would end up using delayed data that could lead to more losses.
Other issues include slippage. This happens when there is a big difference in time between placing an order and its execution. Therefore, the price difference creates a loss on entry. These small losses can accumulate and weaken a trader’s performance.
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DIFFICULT CHALLENGE OBJECTIVES
Prop trading can be a rewarding experience that allows traders to increase their income. As a result, prop firms have gained a lot of popularity. However, some of them are more focused on making money than getting skilled traders. These firms make money when a trader fails a challenge. Therefore, they set difficult challenge objectives. However, they offer a lot of money, which draws the attention of beginners and professionals.
Difficult challenge objectives can cost a trader a lot of money. If you have to repeat a challenge many times before you win, you spend a lot, even before trading. These firms set big target objectives with little time to complete the evaluation. Meanwhile, others have such tight daily and maximum losses.
Traders should go through the objectives of a challenge and compare them to other prop firms. The harder the challenge, the more likely you are to fail. Therefore, you might spend a lot. On the other hand, simple objectives give you a higher chance of winning on the first try.
HIDDEN RULES
Another dark side of stock prop firm trading involves hidden rules. Many times, traders will lose their accounts for violating rules they never knew existed. Some firms have hidden rules on risk management, trading strategies and trading times.
For instance, a hidden rule can state that you should not trade during times of high volatility, as this will increase your risk. Therefore, unknowingly, you might take a trade before a key economic report.
Meanwhile, some prop firms do not allow certain types of trading strategies. However, they fail to clearly state such a rule and traders lose their accounts.
Finally, some firms can have a minimum or maximum duration for holding a position. Meanwhile, some might prohibit holding positions over the weekend. However, if these rules are hidden, then many traders will lose their accounts unfairly.
EMOTIONAL PRESSURE
Stock prop firm trading can create a lot of emotional pressure due to the ever-present rules, limits and targets. To become a prop firm trader, you have to be prepared for this dark side. The freedom you experience when trading with a broker disappears. If you cannot bear this emotional pressure, it will affect your performance or your motivation to work with prop firms.
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