Forex prop firm challenges or evaluation programs are agreat way to prove your trading skills and get funded by aprop firm. However, to pass the challenge, you need to follow some rules. One of the most important rules is the drawdown limit (the maximum percentage of your account balance that you can lose).
I know RebelsFunding’s Diamond program has no daily drawdown, which is great news for traders and arare offer in the industry. However, not all programs have a0% daily drawdown. Most programs out there have daily drawdown limits. This is why knowing how to manage drawdowns is anecessity.
Drawdown management is simply the process of using various risk management strategies to stay within aprop firm’s drawdown limits.
If you fail to manage these limits, you will likely lose the account that would have skyrocketed you to the next level.
So, in today’s blog post, we want to share with you ways you can manage your drawdown limits for prop challenge success:
1. Have aPractical Trading Plan
One of the ways to manage your drawdown limit is to have atrading plan. Atrading plan is aset of rules that guide your trading decisions. Your trading plan should include your risk management rules, position-sizing rules, and entry and exit criteria. By following your trading plan, you can avoid making emotional decisions that could lead to big losses.
2. Set your own Daily Drawdown Limit
You can set your own daily loss limits that are more conservative than the limits imposed by the prop trading firm. This will give you an additional buffer to avoid reaching the firm’s limits. Set an amount or percentage below what the prop firm has set for you.
Setting your own daily drawdown limit can help you maintain control over your trading activities and succeed in the evaluation stage.
3. Work within the Drawdown Parameters
Let’s assume that you are trading aprop firm challenge account of $10,000 with a4% daily drawdown limit. This means that you can only lose 4% of $10,000 ($400) of your account balance in atrade per day before you fail the challenge.
To manage this drawdown limit safely, you need to adjust your risk per trade. For example, you can decide to only risk no more than 2% to 3% on any single trade per day. This will help you stay within your drawdown limit for aday and protect your account balance.
Also, to manage your maximum drawdown well, make sure you don’t lose more than the percentage set. If you’re trading with a$10,000 account and the overall maximum drawdown is 10%, make sure you donot lose more than atotal of $1,000 across the lifetime of your account.
4. Focus on Managing your Losses
If you focus on managing your losses, you will be more likely to pass the challenge and become afunded trader. Before each trade, you should assess your maximum loss. This is the amount of money that you are willing to lose on the trade. Once you have assessed your maximum loss, you can place your stop-loss order accordingly.
It is important to note that you will not win every trade. However, if you manage your losses effectively (by implementing the tips below), you will still be able to pass the challenge and become afunded trader.
- Use stop-loss orders: Stop-loss orders are essential for managing risk and limiting drawdowns. Astop-loss order is apre-placed order to sell an asset at acertain price. This can help you exit alosing trade quickly and minimize your losses.
- Use risk-to-reward ratio: Risk-to-reward ratio can differ from trader to trader, but it’s ideal to use aconservative risk-to-reward ratio.
If you follow these drawdown management tips, you will increase your chances of success in forex prop firm challenges and become afunded trader.
