Common restricted trading strategies in prop firms affect many traders, often without their knowledge. Restricted trading strategies can sometimes lead to unexpected hurdles and even disqualification. Being aware of the restricted strategies and how to navigate them can help you avoid disappointments and actually increase your chances of success.
Not Using the Stop Loss Order
Many trading firms mandate the use of stop losses on each trade to limit losses, which can potentially restrict traders who use strategies based on wider drawdowns to capture larger market movements. With that said, you must also follow the rule of max risk per position, which limits the capital that can be risked on a single trade. Prop firms limit potential losses with a stop-loss order by closing trades automatically when a specific amount is reached, which further prevents potential setbacks for the firm and the trader.
HFT or High-Frequency Trading
HFT is the trading practice where traders make trades in quick sessions with the goal of accumulating profits from the smallest price fluctuations. HFT is performed with the help of algorithms. Prop firms usually forbid HFT due to the trader’s ability to take full advantage of the market inefficiencies. Tick scalping is also related to the HFT tactic and is also restricted by prop firms, as it is believed that these trading strategies cause unstable markets.
Grid Trading
Prop trading firms restrict grid trading because of its link to market manipulation. Grid trading can cause risks such as over-leveraging, artificial market movements, volatile market conditions and strain on trading systems. Grid trading usually involves the placement of buy and sell orders at fixed price intervals, which subsequently creates a grid of trades. Apparently, this trading scheme appears structured; however, it can actually destabilize the markets, especially during periods of market volatility. Nonetheless, prop trading firms prohibit traders from pursuing this trading strategy.
Sharing Account for Passing the Challenge
Yes, you read this right! Prop trading firms actually prohibit the strategy of sharing accounts with third parties to get help in passing the challenge. When you share your account and enable third parties to trade on your behalf, you are essentially compromising the integrity of the trading process. By sharing your account, you will increase your risk of getting your account closed and also losing any profits that you might have made. Nonetheless, the point is that it is certainly in your best interest to do all the trading yourself. You can find mentors and network with pro traders who can guide you through the challenges.
Understanding the Consequences
The biggest reason why prop trading firms prohibit the above-mentioned trading strategies is that they want to preserve the integrity of the market by establishing fair market conditions. This is why most prop trading firms outlaw manipulative tactics, such as HFT or grid trading. Many prohibited tactics come with high risks that can endanger the firm’s capital and the trader’s accounts and cause overall financial instability. Also, prop firms want traders to stick to regulatory norms to ensure compliance.
Conclusion
Before trading with a prop firm you need to know what restricted trading strategies the firm does not allow. Following the rules is essential to keeping access to a funded account. There may be limitations on what percentages you can trade and must imply stop loss orders. Being aware of their guidelines will ensure trading success.