For Business

Risk & Money Management

How Prop Firm Risk Rules Work

A prop firm lends trading capital on a contract of numbers: a daily loss limit measured on equity with floating losses included, an overall drawdown limit that may be static or trailing, a profit target and a minimum number of trading days, with a single breach closing the account. This paper shows you the four numbers on an example 100,000-dollar evaluation; the idea as a driving test where one serious fault ends the test; the equity walking a corridor between a daily floor that resets every morning and an overall floor that never moves; the two kinds of overall floor; and the Mailbox message on your platform when the firm's server reaches a floor and closes everything.

Difficulty
Advanced
Reading time
5 min
Pages
8
Reviewed by
Saman Rahbar

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The four numbers on an evaluation

A prop firm lends trading capital on a contract of numbers, and the numbers are the whole of the contract. In example figures for a 100,000-dollar evaluation, and every firm's own figures differ: a daily loss limit of five per cent, measured on the equity from the day's starting balance with floating losses included; an overall drawdown limit of ten per cent, measured from the starting balance or from the account's high point; a profit target of ten per cent in closed profit; and a minimum number of trading days. A single breach of either limit closes the account, and the fee paid for the evaluation is not returned.

A driving test

Picture a driving test. Minor faults are noted and the drive goes on; one serious fault ends the test there and then, and the rest of the drive is not marked, however good the parking was going to be. A prop firm's evaluation is that test. The daily and overall limits are the serious faults: a single breach is the result, and the profit made before it and the skill shown after it are not on the sheet. The examiner does not average the drive. The firm does not average the month, and that is the thing about the rules that is easiest to misread from outside, where a month is usually judged by its total.

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