The Top 4 Mistakes Prop Traders Make

What are some of the common mistakes made by prop traders?

Prop trading, short for proprietary trading, is the practice of financial firms or commercial banks engaging in trading for direct profit, rather than doing so on behalf of investor clients. To do this effectively, prop trading firms hire prop traders, who use the firm’s considerable capital to turn a profit.

A prop trader’s continued employment at the firm is heavily dependent on their trading performance, making the job an incredibly high-pressure one. Because of the stressful conditions they trade under - and for longer than average work hours - they’re prone to making mistakes.

Whether you are currently employed as a prop trader, preparing to enter a career in prop trading, or simply interested in the industry, it’s useful to know what mistakes prop traders make, and how they can be avoided.

Let’s take a closer look at each of these.

Lack of preparation

In the world of trading, sufficiently preparing is one of the most crucial aspects of a successful trading strategy. Without a carefully developed plan, traders would be throwing out trades into the wind, without a clearly defined blueprint for what to do in the event of unforeseen circumstances.

Prop traders who do not develop a trading plan might engage in inconsistent strategies or lack a systematic approach. They may lack a clear direction and objectives, making it challenging to navigate the markets effectively. Not backtesting their outlined strategies using historical data is also a surefire way to incur unnecessary trading difficulties. Not implementing stringent risk management techniques also leaves traders open to magnified chances of losses and makes the long-term handling of their portfolio more stressful.

Emotional trading

To describe prop trading as “stressful” is an understatement. The constant pressure to perform well in multiple financial markets while in a fast-paced competitive environment inevitably causes tensions to run high. Regular traders often fall victim to emotional trading, but this can be exacerbated in a prop trading role.

Due to the increased need to continuously turn a profit to keep their job, prop traders might make impulsive trades, using emotions such as fear or greed to decide their entry and exit points, rather than using a disciplined strategy and risk management. They might engage in “revenge trading” whereby they prematurely enter a new trade to make up for an emotionally devastating and significant loss, with the hope of recouping the costs. Additionally, if the ‘fear of loss’ takes hold (which is common in trading), prop traders might make irrational and impulsive trading decisions.

Overtrading

Overtrading is the excessive buying and selling of financial assets, where a trader takes on too many trades and doesn’t give each trade enough time to develop. Prop traders, in their pursuit of exceptional performance within their trading firm, are likely to engage in overtrading. The frequent buying and selling can lead to increased transaction costs, higher levels of risk exposure, and may result in overall undesirable trading execution.

Chasing trends

Trend chasing, or “trend following”, is the behavior of entering or exiting a trade or investment as a reaction to an already occurring trend. Chasing a trend can be classed as “herd mentality” as it involves following the actions of others, typically entering a trade at a newly increased price, or selling at a low price after a large sell-off. An inexperienced prop trader may make the mistake of chasing a trend by, for example, seeing that a stock is moving in a positive direction and buying in to capitalize on its momentum, only to see trend exhausted and reverse.

Best Prop trading firms

1

9.4/10

Go to broker

Your capital is at risk.

Minimum deposit:

$1

Review

Topstep is a leading proprietary trading firm offering traders the opportunity to trade futures contracts. With a unique two-step evaluation process, traders can prove their skills on a simulated account before potentially receiving funding for live trading.
Topstep offers three account sizes: $50,000, $100,000, and $150,000. Regular pricing starts from $165/month, with frequent discounts available. Traders can leverage up to 1:100 and access diverse futures markets, including stocks, commodities, crypto, bonds, and metals. Commissions and fees charged on the Trading Combine (simulation account) align with those on a live funded account, helping traders develop skills for real markets.
Topstep supports traders with educational resources, including free group coaching, to enhance their chances of success.

Pros/Cons

•Real trading accounts are financed by a broker, there is no need to invest your funds in trading.

•The company provides a wide range of free training materials, including free group coaching.

•You can contact the support team using several convenient methods.

•The broker offers a referral program for extra income.

•The company doesn’t offer bonuses, automated trading, or other passive income options.

•The support service works only on weekdays during set hours.

Study Review

2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

€155

Review

FTMO is a prop trading firm offering experienced traders the chance to manage a funded account of up to $200,000 with a wide range of instruments including Forex, stocks, indices, commodities, and cryptocurrencies. To qualify, traders must pass a two-step evaluation process.
Beginners may start with a Free Trial account which has the same trading conditions as the challenge ones. Long-term traders are free to use a Swing Account that has no restrictions on holding positions over the weekend or trading during macroeconomic releases. The company offers trading with the most popular platforms – MT 4/5, cTrader, and DXtrade. The leverage is up to 1:100.
Additionally, FTMO is recognized for its educational resources and continuous support.

Pros/Cons

•Quite low testing cost is €155.

•Classic platforms such as MT4, MT5, and Ctrader are familiar to many traders. For these platforms, hundreds of indicators, scripts, and advisers have been developed.

•The starting reward is 80%.

•Diversification of tariff plans. Candidates can choose a demo deposit from 10 thousand to 200 thousand US dollars. There are tariff plans that span from standard to aggressive trading.

•Leverage is up to 1:100.

•Strict requirements for the test period. The allowable maximum loss is 10% of the deposit amount. The target profit is 10%, for which 1 month is provided.

•There is no information about how the company is funded.

Study Review

3

9.1/10

Go to broker

Your capital is at risk.

Minimum deposit:

$119

Review

Funded Trading Plus clients trade CFDs on currency pairs, indices, precious metals, energies, and cryptocurrencies. There are 18 programs with one- and two-phase challenges, or without evaluation. These programs also differ in initial fees, profit targets, maximum total drawdown, and other criteria. Traders can receive from $5,000 to $200,000 under management upon successfully passing the challenge or immediately if they choose the program without evaluation. Scaling up to $2,500,000 is available. The profit split is 80%/20% at the start and 90%/10% or even 100%/0% later. Traders work on MetaTrader 4 and MetaTrader 5. Leverage is up to 1:30.

Pros/Cons

•Wide choice of programs with universal parameters and acceptable requirements;

•One-time initial fee, refundable for programs with one- and two-phase challenges. No monthly subscription;

•Simple and understandable conditions, no hidden obligations, and profitable trading split;

•The prop firm partners with Eightcap and ThinkMarkets. It offers spreads from 0 pips and low trading fees;

•A demo account with $100,000 in virtual funds is available for exploring the trading process and instruments;

•24/7 technical support is provided via four communication channels;

•Deposits and withdrawals are made with Visa, Mastercard, bank transfers, and crypto wallets without fees.

•The Master program without evaluation is very expensive — a non-refundable initial fee of $4,500 is required for the balance of $100,000;

•Funded Trading Plus offers only CFDs without real assets or futures;

•The firm’s website contains much information, but some important nuances, like the reset fee, are not provided.

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How prop trading firms can help traders avoid mistakes

One of the core benefits of being a prop trader rather than an individual trader, is being part of a larger team and organization. As employers, prop trading firms can help their traders to avoid mistakes by taking several steps.

• Provide training and education. Prop trading firms play a pivotal role in educating and training their traders. This includes imparting knowledge on market analysis, trading strategies, risk management, and the effective use of their trading platforms. Continuous education helps traders to stay ahead of market changes, enhancing their ability to adapt to evolving conditions and reducing the chances of making mistakes based on their lack of understanding.

• Set Clear expectations and guidelines. Proprietary trading firms establish clear expectations, rules, and guidelines for their traders. This includes defining their own risk parameters, acceptable trading practices, and performance quotas. The clear guidelines prevent traders from deviating into risky trading territories and help them to align their activities with the firm’s financial objectives, fostering a cohesive trading environment.

• Monitoring trader performance. Prop trading firms actively monitor and assess the performance of their traders. This involves analyzing their trade data, risk metrics, and how well they adhere to established guidelines. This allows trade firms to detect mistakes or deviations from strategy early on and enable timely intervention, and, in turn, provide valuable feedback to traders to facilitate their continuous learning.