Algorithmic and Mechanical Forex Strategies | OneStepRemoved

Prop Trading Plan For Success

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Every successful forex prop trader or other small business owner sets a course with milestones leading to specific objectives. And, when limited account sizes are traded using maximum leverage, the chosen goals must be realistic and well-planned. Most importantly, it’s better to work on eliminating trading mistakes rather than to focus on meeting performance targets alone.

Personal responsibility

As a trader, it’s important to “own” the results of each trade, whether good or bad. Like children, new traders grow and mature by taking personal responsibility for their trades and learning from them, no matter the outcome of any single trade. It’s a journey to build a trading success story.

A trader should rejoice at each winning trade, and plan for further successes by carefully reviewing why that trade was profitable. By doing so, winning becomes a well-planned routine.

Likewise, with each painful loss a trader should learn something, and find a way to do things differently during the next trade. Successful prop traders know each lesson learned is valuable, regardless of whether that trade was a winner or loser.

Passion and planning

For a prop trader, the thrill of trading is just as important as the financial gains. For anyone contemplating a career in prop trading, passion is just as important as planning for success. Yet, passion alone isn’t enough to ensure a trader’s survival.

If a trader is motivated only by the idea of buying exotic sports cars and scantily-clad women, he’s not likely to last over the long run. Good planning is also essential. For traders who are caught up in the excitement and overconfidence of a series of profitable trades, it’s better to focus on what’s already been accomplished, then learn from it and build upon it, instead of overreaching.

Regular, objective reviews of trading performance are the forex prop trader’s best way to improve profits. As mentioned above, when you’re using an already-winning system it’s easy to earn more money simply by identifying and avoiding ever-smaller errors over time. Ask any football coach – Most games are won by whichever team makes the fewest errors.

Maximum leverage requires maximum planning

The power of extreme leverage requires careful planning and quick learning. Losses can occur very suddenly. Have you thought about how you’d handle that situation?

Shaun and other leading prop traders take personal responsibility for their trading outcomes, and they’re quick to learn from their results, both good and bad. Also, they avoid becoming greedy – each month, they pull profits from winning accounts, so accounts stay small.

Use Maximum Leverage To Grow Profits And Reduce Risks

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The gains can accumulate quickly when a prop trader is using a strategy based on maximum leverage with limited account size. In order to preserve and build those gains, it’s important to remove them from the trading account according to a good plan.

As described in previous articles in this series, the high-leverage, low-balance strategies used by leading prop traders can be applied to multiple trading accounts using different systems, with each account capitalized by not more than a couple thousand dollars.

The amount in the account typically ranges between $1,000 to several thousand dollars. That way, there’s no psychological obstacle to using the max leverage on each trade.

Reduce the risks from drawdowns

When you have a winning system, profits pile up. It’s tempting to “let it ride” by using the same system to trade ever-bigger position sizes in the growing account.

However, when the entire capital is available in the trading account, it means that the capital is exposed to the inevitable system “blow up,” which typically causes a steep drawdown. Even if the trader escapes financial catastrophe, he or she may become so risk-averse afterward as to become indecisive and ineffective.

Pull money out each month

The smart way to avoid excessive drawdowns due to trading system “blow ups” is to pull money out of the account at the end of each successful month. That way, when a major drawdown occurs, it won’t take all your money, just the couple thousand dollars that you can afford to lose.

Successful prop traders like Shaun sweep the profits out of each winning trading account monthly and move them into a non-trading account, where they remain safe. So, each month the trading accounts open with their individual capitalization set at a given amount.

Pull out at least enough to cover one “blow up”

Once you’ve launched your forex system, you’ll want to think about earmarking enough money to cover at least one trading system failure. After you’ve secured that amount to be used for a recapitalization of your trading account, every subsequent gain is “free money,” at least in a psychological sense.

The first milestone is to pull enough money out of the trading account to cover at least one catastrophe. If you’ve been enjoying mostly winning months, next you should allocate 50% of your profits for high-risk systems.

You can’t lose what’s not at risk

Keep in mind: When a prop trader is using maximum leverage, the only money that’s safe is the money already pulled out of the trading account. Profits should be pulled from each winning trading account, each month.

When a prop trader wins consistently using high leverage with a limited-size account, the gains from relatively small individual trades may compound quickly. Profits gathered from the overflowing small trading accounts can compound into large sums, and it’s important to manage those profits effectively.

If you’d like to learn more about using maximum leverage to pull profits each month, just contact Shaun.

The importance of Monday Morning quarterbacking

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As described in previous articles in this series about how to win as a prop trader, managing your forex business like a prop trading shop increases your chances of winning. Successful prop traders use maximum leverage with limited account size, and they pull profits regularly to limit risk in case of a trading system “blow up” resulting in a steep account drawdown.

Monday-morning quarterback wins the game

According to many traders, a trading system’s performance never stays the same: either it improves, or it becomes worse, perhaps even “blowing up.” Although Monday-morning quarterback is often derided for criticizing or suggesting alternative courses of action in hindsight after an event, performance review is critically important for trading success going forward.

Critical review of previous trades and system performance means the difference between success and failure for prop traders, especially for those who are responsible for leveraging other investors’ capital.

Independent traders must evolve by ruthlessly facing and correcting their shortcomings, or become extinct by losing their trading capital.

And, beyond remedying the causes of losing trades, Monday-morning quarterbacking also works to examine and highlight the winning characteristics of particular trades. Shaun and other successful prop traders look beyond the emotion of the trading moment to make sure that subsequent trades are even better.

System review and human review

If you’re trading manually with discretion, think about what you could do differently in order to help you focus and perform better, with less stress and more discipline in your decision-making protocols.

If you’re trading with a mechanical system, think about whether the performance of your live account matches the expected results from your back-tests during the same time frames. If not, find out the reasons for the discrepancies, and you’ll earn more money as a trader.

Ask the difficult questions early, avoid the errors later

As a mechanical trader, you should also plan ahead to avoid or quickly adapt to any negative situation or market scenario that might cause your system to fail, even temporarily.

By thinking carefully about previous trading glitches and losses in search of valuable lessons, you’ll be able to minimize the impact of those events if they occur in the future.

Prop traders thrive with the right tools

Prop traders can thrive with the right performance-enhancing tools, especially when using trading systems built and managed by experts. The first step toward successful prop trading is to ask the difficult questions about current performance, and then fully address all issues that are discovered during the critical review.

How To Pull Profits Like A Pro

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As mentioned in a previous article about managing your forex venture like a “prop trading” business, using maximum leverage can truly minimize your at-risk capital. Successful prop traders leverage their accounts and risk every dime of allocated capital each month.

The idea is that a winning trading system will accrue profits quite rapidly, but if the position sizes are increased along with the expanding account size, eventually a “blow up” will intervene to cause a steep drawdown.

The key is to mechanically limit the amount of capital allowed to accumulate in the trading account during winning periods. Prop traders set a par account size, and at the end of each month they “sweep” the overflow from gains into a separate, non-trading account. The account opens each new trading month at the same par size.

By doing so, gains are preserved intact while serious drawdowns are limited to the account’s monthly highwater mark. Profits from winning months are retained, and are protected from risk.

Setting a limit on capital at risk reduces the risk of a trading system “blow up”

By sweeping excess cash from the account, a prop trader reduces the risk from a catastrophic drawdown. The traditional practice of small, independent traders is to treat the entire account as a single unit which they attempt to grow as large as possible. Yet, this can be dangerous.

At some point, every system suffers a “blow up.” When this happens, everything may be lost if the trader hasn’t stashed away some of the previous profits. Prop traders avoid this catastrophic scenario by limiting the trading account size.

As a trading account grows, the savvy prop trader pulls profits out in order to keep them safe. For example, at the end of a given month, assume that a trading account whose par value has been set at $5,000 may now total $6,00. So, the overflow $2,500 is swept into a separate account not accessible for trading or margin.

The trader then begins the new month with the par $5,000 and once again the account should begin to accrue gains at the same consistent rate, by using the same trading system.

Crazy margin for outsize gains

By trading a winning system while using maximum leverage and limiting the amount of capital at risk, an entrepreneurial prop trader can harvest profits from a wide range of forex markets. And, traders who are supported by prop shops have access to highly sophisticated risk-management tools to help them grow even faster.

Maximimum Leverage To Minimize Risk

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Leverage is the rope with which most forex traders hang themselves. Yet, when this powerful tool is used carefully it greatly improves trading performance. In fact, prop traders can use maximum leverage for the best gains while also minimizing risk; below we’ll describe how Shaun does it.

Legacy risk-management strategies

Most traditional forex risk-management strategies are based on either limiting the amount of loss per trade or per market as a percentage of the account’s equity, or else tightening the parameters of trades going forward based on current losses.

Most traders typically increase or decrease their degree of leverage and position size according to wins or losses over some period of time.

Max leverage for minimum risk

Yet, even though it may seem counter-intuitive, savvy prop traders use maximum leverage to minimize risk. It’s true – Traders like Shaun use leverage to minimize at-risk capital while maximizing the compounding power of a series of winning trades while using a good system.

How? By limiting the amount of money allowed to accumulate in the brokerage account during the monthly trading cycle.

Throughout the month, a successful trading system harvests gains from the marketplace. Most traders allow those gains to accrue and use them to trade ever-larger lot sizes, even while using the original system and risk-management strategy. During a winning streak by any given system, the results can be impressive.

Of course, the trouble is that nearly all trading systems, if operated over a sufficient period of time, will “blow up.” When a system “blows up,” it can lose the majority of the trading account equity very quickly. That is, the system fails to the extent that it either runs out of money or the original trading rules must be significantly modified.

How? By limiting the amount of money allowed to accumulate in the brokerage account during the monthly trading cycle.

Exacerbated by leverage, the occasional system failure is what keeps most traders poor. During a period of deep drawdown, weak traders go out of business because they lack trading capital. They haven’t put anything aside for “seed” funding.

Manage risk by sweeping excess cash from the account each month

To reduce both the technical risks of a trading system failure as well as the psychological pressure of facing drawdowns, Shaun and other prop traders “sweep” excess cash from trading accounts each winning month, so that the months’ beginning equity balances are all the same.

Keep the least amount of money with the broker

That limits the total risk in case of a blow up to a maximum of only a single month’s preset trading account limit. Gains from previous winning months are safely sequestered in a different account, away from the trading account.

“Prop shops” minimize risk under leverage

Proprietary trading firms generally use sophisticated risk-management systems to monitor individual risk management and prevent monthly drawdowns from exceeding threshold levels.

Everyone wants to make sure prop traders manage risks effectively while leveraging their own capital, as well as the firm’s money.

Risk every dime in the account, each month

When a system works well, traders like Shaun leverage their capital to maximize gains and trade the largest practical position size. The profits from a string of successful trades can accumulate exponentially.

And, to ensure gains are protected, each month Shaun “sweeps” any gains from the trading account, reducing it to its predetermined par level. It’s critically important to pull profits on a regular basis, so they won’t be subject to loss.

Whenever a losing month does happen (and it will!), you top up your balance. The idea here is that instead of trading a $50,000 account, all of which is subject to loss, you only put something like $5,000 into an account. That’s money that you’re truly able to lose.

Are you happy if you lose it? Of course not. But as a risk-focused trader, you know that even if you lose the money, your financial situation shouldn’t be severely impacted.

$5,000 probably isn’t the exact number for you. Maybe it’s more. Maybe it’s less. The point is, once you know your max loss number, it’s a lot easier to kiss it goodbye and put it into the account. Then, if you get the performance that you’re expecting from your trading system, the return on investment (ROI) can yield some eye popping numbers.

This chart is the Myfxbook verified performance of my trading account.

If you’d like to learn about pulling profits from your account and other prop trading tips, stay tuned for the next article in this series.

The Basics Of Prop Trading

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Shaun’s been attracting plenty of attention based on the recent performance in his high risk account, which parallels a proprietary trading scenario. Sometimes also called “prop trading,” the term generally refers to a range of opportunities offered by an investment fund or speculative firm to individuals who trade for the firm’s account.

For traders who have a real talent for forex, yet very little capital of their own, prop trading may be the pathway to a good career or supplemental income.

What is proprietary trading?

To avoid confusion, it’s important to understand that the same term is also used in a different context to refer to the basic concept of any brokerage firm or financial institution that trades in-house for its own account, in addition to processing trades for outside clients of the institution.

In effect, that firm seeks to profit from successful trades rather than commissions from clients’ trades.

Yet, independent traders generally use the term proprietary trading to describe a relationship by which they trade funds for a smaller, more speculative investment firm. In short, the traders use the firm’s money to apply their own strategies, and if successful the firm shares the rewards with the trader.

A “prop shop” is a proprietary trading arrangement with a group of individuals who trade electronically, either at the firm’s facility or in independent trading offices using the firm’s resources. Prop shops provide their traders with the resources necessary for success, including education, capital and trading platforms.

Prop shops have their historical foundations in banks’ proprietary trading. Traditionally, banks and brokerages would make a market in securities and derivatives in which they held positions, in order to facilitate liquidity in the marketplace.

Over time, financial institutions’ in-house traders developed their own proprietary strategies and systems, hence the name.

How prop trading normally works

There are a wide variety of prop trading programs offered by various funds and financial firms. Most do not require the trader to invest money, although some offer prop-trading courses or other educational purchases as part of a package.

All prop shops use performance metrics to monitor trading results and apportion compensation. Traders who have winning forex systems are usually allocated trading capital beginning at $100,000 and well-proven traders often trade far larger proprietary accounts.

Prop trading scenarios require the applicant trader to show early promise of successful trading ability. Some proprietary trading companies use a “farm team” approach by requiring applicants to trade demo accounts online and then selecting the best candidate traders.

Others accept applicants into their trader-education programs which ultimately lead to proprietary trading accounts for the traders who excel during the training phase.

For beginners who show potential, the prop shop usually offers plenty of mentoring and education, as well as technical and psychological support.

In a prop shop, it’s up to each trader to prove his or her ability to consistently squeeze gains out of forex markets. Over time, the successful trader receives progressively larger allocations of capital. So, the trader’s potential income likewise grows.

How does this apply to Shaun’s trading? Tune in for next week’s article, where I’ll cover the biggest mistake most traders make.