Hidden Rules in Prop Trading (2024)

In this article, we are going to discuss the covert regulations that prop businesses have in place, which prop traders need to be aware of to keep their accounts from being closed. The vast majority of us are aware that the websites of certain prop trading businesses do not include an explanation of all of the regulations that might cause you to fail your assessment or lose access to your funded account. Nevertheless, because they are included in the terms and conditions, they are safeguarded. These are the Hidden Rules, and every single prop trader ought to have gone through them.

As a Prop Trader, are there any hidden rules that we could run into?

To begin, here are some common trading methods and guidelines that are not allowed by prop trading firms:

  • Trading at a high frequency
  • Extremely quick skinning
  • Arbitrage trading based on latency
  • Any strategy for the removal of ticks
  • Any trade that involves a reverse arbitrage
  • Any trading that involves hedging or arbitrage.
  • Spreading your risk across many accounts

As a Prop Trader, you should be aware of the following hidden rules, which are not displayed elsewhere

Let’s go over some of the other restrictions that are almost always hidden from view after we’ve covered the basic trading methods and rules that are not allowed by prop businesses. These are frequently violated without the perpetrators even being aware that they exist.

  • Self-control and Belief in Trading Strategy:

Although it’s difficult to develop, discipline is essential for profitable trading. The key to long-term success is sticking to a well-thought-out trading plan, even when you’re on a losing run. This shows dedication and belief.

  • Steer Clear of Mainstream Crowds:

Profitability frequently transcends the perception of the market as a whole. Engagement in chat rooms and stock boards, where earnest conversations are uncommon and self-serving agendas are prevalent, can adversely impact trading.

  • Constant Communication with the Trading Plan:

The trade strategy is a dynamic instrument that has to be updated often to incorporate fresh concepts and eliminate outdated ones. Reviewing the strategy may provide remedies when trading encounters difficulties.

  • The importance of working hard and avoiding shortcuts:

To trade profitably, one must be diligent. Using haphazard or insufficient tactics frequently fails. Determination and diligence are necessary for steady, long-term success.

  • Steer clear of blatant trade setups:

It’s common to find profitable possibilities when defying the norm or the herd. A transaction that seems too good might attract too many players and set the trader up for disaster.

  • Respect for Trading Regulations:

Discipline is compromised and even greater losses might result from breaking or disregarding established trading principles when faced with difficult circumstances.

  • Be wary of market gurus:

Recognizing that market experts’ advice is frequently influenced by their interests, it is essential to concentrate on one’s trading approach as opposed to mindlessly adhering to outside recommendations.

  • Juggling the Aesthetic and Mathematical Aspects:

Combining intellectual and intuitive talents is necessary for trading. Improving one’s creative and quantitative skills might lead to better long-term results.

  • Steer clear of emotional attachments:

Being too committed to a particular investment might impair judgment. Rather than establishing a personal bond, the goal is to take advantage of market inefficiencies.

  • Juggling Needs for Trading and Personal Use:

Taking care of personal matters is essential to sustaining trading performance. Success in both domains depends on keeping personal and trading demands apart.

  • Embracing and Handling Setbacks:

It’s important to accept failing transactions and adhere to tried-and-true tactics. Impulsive attempts to recoup losses may result in bigger losses.

  • Recognizing Early Warning Indications:

Bad things might happen if you ignore technical signs that point to possible losses. For risk management, it is essential to keep an eye on these indications and the state of the market.

  • Using Tools Savvily:

It is crucial to use trading tools in conjunction with a trading plan. Over-reliance on automated tools might prevent you from making important decisions.

  • How to Create a Unique Trading Identity:

While it’s beneficial to take advice from successful financial role models, success ultimately comes from developing one’s trading approach based on one’s talents and risk tolerance.

  • Steer clear of the ‘Holy Grail’ hunt:

Disappointment frequently results from thinking there is a magic formula for success. Not quick cuts, but clever tactics and risk management lead to success.

  • Difference between the Work Week and Trading:

The distribution of trading earnings is not constant throughout the year. It’s counter to the work-week reward attitude to realize that most gains are made on a few trading days.

  • Getting Paid Quickly:

Gains are shielded from future market reversals when profits are secured early. Gain security may be achieved by employing strategies like trailing stops and taking partial profits.

  • Focus Simplified to Price Action:

Making decisions more quickly and with less complexity is possible when technical indicators are used in conjunction with price movement as the primary trading tool.

  • Learning to Accept and Learn from Setbacks:

In trading, losses are an inevitable part of the learning curve. A trader’s development and resilience are influenced by their ability to accept, learn, and take pauses when necessary.

  • Warning: Don’t trade for thrills:

Making rash, illogical judgments while trading for thrills and rushes is possible. Successful trading requires avoiding trading only for the rush.

What are some examples of behavioral biases that negatively impact the success of traders?

The study of behavioral finance has identified several negative flaws and psychological biases that might hurt a trader’s performance. One of these biases is called loss aversion, and it occurs when traders hang on to losing positions for too long and sell winning positions too early because they are afraid of locking in a loss. This concern drives traders to take higher risks when they are already in the red. One such example is the phenomenon known as recency bias, in which more recent information or news is given a higher weight, even though it may not be representative of longer-term patterns.

The Bottom Line

The vast majority of traders never realize their full potential and, as a result, eventually, sell all of their holdings and look for more conventional ways to generate money. By adhering to time-honored norms that were developed to maintain a laser-like concentration on maximizing profits, you may earn the right to call yourself a proud member of the elite professional minority.

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