Trading with a prop firm allows you to control a larger amount of capital than you would be able to with an individual trading account. When you profit, you receive a cut, and the prop firm receives a cut. This can add up to more than you could make with a small individual trading account. What types of strategies work best for prop firm trading?
Let’s go over some of your options. We are going to give a breakdown by timeframe.
1. Scalping
In forex trading, scalping is any type of trading where you are profiting off of very brief moves, typically on the 1 and 5 minute charts. These types of trades may last minutes, or even seconds.
Scalping strategies are fast-paced and challenging, and subject to high volatility, making them fairly risky. But for those who excel at them, they can be highly effective.
Why consider them specifically for prop firm trading? Quite a few prop firms do not allow traders to hold overnight positions, or only allow them under certain conditions. Scalping lets you trade without worrying about this limitation since you will be in and out of trades quickly.
Caveat:
Not every prop firm allows scalping. You will need to check the rules for your prop firm to make sure that it is all right before you proceed.
2. Intraday trading
Intraday trading is any type of trading that takes place within a single day. It can include scalping, but also trades that last longer, spanning multiple hours before you exit.
Strategies on this timeframe can be an excellent choice for prop firm traders. For one thing, you are not going to run into restrictions on overnight trading or scalping.
For another thing, if your trades last hours, you will be subject to less volatility than you would be if you were trading on the 1 or 5 minute timeframes. So, this is a good way reduce a bit of your risk exposure as well if you stick with longer intraday trades.
3. Swing trading
Swing trading is when you hold your positions for medium lengths of time, such as for a few days.
It is recommended that most forex traders get started this way, rather than with shorter term trades.
There are a couple of reasons why:
• Lower volatility: Volatility is not as crazy on the hourly or daily timeframes as it is on the 1 or 5 minute timeframes. There are fewer severe whipsaws overall, and that makes for easier trading conditions.
• More time to think and act: A lot of new traders get overwhelmed by the speed at which they have to move when scalping, or even doing longer intraday trades. The slower pace of swing trading may prevent panic and help you avoid mistakes that can result from rushing.
Caveat:
As we have mentioned already, there are some prop firms that do not allow you to hold positions overnight. If you want to do swing trading, you will have to find a prop firm that does not place these types of limitations on traders.
4. Position trading
Another option is to take even longer-term trades. You can stay in trades for weeks or even months. This is known as position trading.
Some people prefer position trading to get even further away from high volatility. Others like being able to get into a trade and then focus elsewhere for long periods of time rather than constantly watching and interacting with charts.
Caveat:
Once again, you need to make sure that you are doing this with a prop firm that does not mind you holding overnight positions.
Another potential issue is if there are profit targets you need to meet within certain timeframes, or if you need to be making a minimum number of trades in some period of time.
Most prop firms will not shut down your account for lack of activity, however. They are much more likely to do that if you blow through loss limits.
5. News trading
We’ve been categorizing types of strategies largely by timeframe, but another possibility is to try a news trading strategy. With this type of strategy, you are specifically targeting major news events and the release of economic reports (i.e. the non-farm payroll report in the US, which is a popular choice for beginning and advanced forex traders alike).
The thinking here is simple: news moves markets. If you can get in on one of those movements, you can make a nice profit. Usually these moves are fairly fast, so news trading is ideal for intraday traders.
Of course, it can be challenging to predict the outcomes of news-related trades, because there are so many economic factors involved. But that is why there are a lot of news trading strategies out there you can try.
Caveat:
Some prop firms allow you to trade the news. A lot of prop firms specifically ban news trading, however.
So, check the rules for the prop firm you are interested in trading with first. Confirm that they allow you to trade the news.
Choose a Strategy, Timeframe and Prop Firm That Suit You
Now you know some types of strategies and timeframes you can consider for prop firm trading. As you can see, a lot of what works and what doesn’t comes down to individual prop firms and their rules.
So, choose a strategy and timeframe that you have the ability to be profitable with, and then find a prop firm that has rules that are conducive to that type of strategy. That way, you will not waste time or money on evaluations for accounts at prop firms that will not fit with your trading method. Good luck.
