For traders looking to trade with more capital without putting their whole savings at risk, trading with a funded account can be exciting. But many traders lose their funded accounts not due to a lack of a good strategy, but their inability to follow risk management. All of the best prop firms have strict funded account risk rules, and sadly, many traders make basic mistakes that result in the violation of the account, and a lost funded trading account.
Common mistakes that traders make and how to avoid them are discussed below to develop trader discipline and protect funded accounts:
The best prop firm wants to see that traders can consistently manage risk, which they base on discipline, not emotions.
1. Going Over the Daily Loss Limit:
Many traders who fall for not following their daily loss limit rules are ones who are emotional. One of the biggest mistakes traders make is not taking into consideration how much they are losing daily in order to manage what risk they take. Any best prop firm sets funded account risk rules for this because they don’t want to risk traders going to their personal accounts and gambling their personal finances.
Many traders know they have a loss limit but still don’t stop. If traders don't make sure to check and see when they reach their daily loss limit they are more likely to end up over-leveraging the account even more or becoming revenge trading on their own money. A best prop firm sets limits such as the max drawdown for the whole account as well as for each day to stop you from having a meltdown and blowing through funded capital.
2. Over-leveraging the funded account:
Being able to trade bigger positions with less capital is a benefit to using leverage, but when used incorrectly can be disastrous to a funded account. Traders get greedy in hopes of turning a funded account in 3 weeks rather than over a period of time, making traders push the boundaries with how much leverage they use. One loss on a high-leverage position can quickly blow up a funded account in an instant, even if the idea behind the trade was good.
Most best prop firms limit what leverage traders can and cannot use because they understand that position sizing is key for a trader to be profitable on a long-term basis, which involves controlling what level of risk they put in each trade.
3. Revenge trading:
This is an all too common and detrimental way of trading. When some traders lose, they become emotional and make new, poorly executed trades in order to cover losses. If this leads to another bad trade and even more losses, this can quickly snowball into a funded account being blown.
A best prop firm would want traders to not react and let them control their emotions when dealing with a losing trade. Losses are a part of the game in trading, but you cannot allow for them to turn into an emotional pursuit of money rather than a calculated trade.
4. Not using a Stop Loss:
Stop losses are very important because they minimize the potential for losses for traders. It’s one of the key things you need to have if you want to succeed with a funded account. If traders choose to not put stop losses or move them further back once a trade begins to go against them, that could be a fatal mistake. You don't want to go too far into the draw down limits for your account.
A best prop firm expects all of their funded traders to look for setups that will increase their profits rather than be risky and end up blowing up an account. If a trader can properly use a stop loss then they are more likely to make it long-term and consistent with their trading.
5. Overtrading:
The less trades a trader makes, the better. But sometimes, even traders who try to follow rules find themselves in overtrading situations. Overtrading is common due to the stress of trying to quickly make money. They take too many positions to make up for the losses they have previously incurred. This can easily get them blown out of a funded account because if the first trade was not profitable, you are most likely making another losing trade when you over-trade.
This comes from not following what set trades should be executed with according to a trading plan. A best prop firm wants to see how consistently you trade and not what the number of trades you made in a certain time period was.
6. Not adhering to a trading plan:
Many traders have a solid strategy, but give up after they see two or three red trades. Most of the time, traders don't lose because they had a bad strategy, but because they deviate too much and switch things up constantly. As a trader, if you can’t adhere to a strategy then the prop firm can't determine your risk and know that you are a disciplined trader.
They want to see a consistently profitable trader that can trade the same setup and follow rules from their trading plan. Best prop firms prefer a more mechanical trader that doesn't play games, and can handle being disciplined to following a trading plan.
7. Not stopping trading when news is happening:
Many prop firms are more strict than others about trading during the biggest, most impacting news times of the week because the markets move way too fast and erratic and is something that can throw off your entire setup and put you in a larger drawdown without seeing it happening till it is too late. As traders, traders see big news as opportunity but some markets can move so far and so quickly that there isn’t even room for their trade to have an entry before a news flash. If traders do not listen to prop firm rules then they can risk their funded account and make a profit based on chance.
The best prop firms want to see a controlled trader, and they are able to help with managing your risk by creating these rules, it is your job as a trader to follow them.
8. Impatience:
Many traders expect to turn a funded account into 5x their money in the first 3 weeks and get frustrated when that doesn’t happen. Being a funded trader is a long-term commitment to consistent profitability. The risk management rules on a funded account are there for the traders to remain and consistently profitable throughout the year. If you can manage your expectations of earning big amounts of money fast then you will perform better. The best prop firms want to see stable results over time, not gamble-for-riches.
Summary:
A trader often blows a funded account because of their inability to follow the proper risk management that each best prop firm has set forth. Overtrading, overleveraging, revenge trading and ignoring stop losses are major risk factors to any funded account and must be avoided to grow your funded trading account. All prop firm risk management rules help the traders survive and become profitable as it allows for an organized approach. The best prop firm trading risk management will build consistency and professionalism in every trader's long-term career.
