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Prop trading or proprietary trading refers to firms that provide traders with funded accounts. Prop firms make money by keeping a small portion of profits made by traders on funded accounts, and also charge small fees for funding challenges they offer. EAs or Expert Advisors are automated trading algorithms that can be deployed on both MetaTrader 4 and MetaTrader 5 advanced platforms. However, EAs can also provide signals or other important information. Let’s dive deeper into the world of EAs and which ones to use for passing evaluation challenges successfully.
Understanding prop trading challenges
Prop or proprietary trading firms are financial companies that allow traders to use the firm’s capital for trading purposes. The firm typically keeps around 10% of profits made by traders and collects small audition fees to test traders’ abilities. Prop traders are traders who use funded accounts provided by prop firms to speculate on financial markets and make profits. Prop firms usually allow traders to keep the majority of their profits, around 75-90%. The industry average profit share is around 80-85% and anything below that is not attractive to traders. Traders are required to pass preliminary challenges to prove they can achieve profit targets while managing risks effectively. To make it more easy to understand, here is how a typical prop trading challenge works:
- Trader signs up for a funding challenge, selects the funded amount, and pays corresponding fees which are usually very tiny compared to a funded account
- Prop firm provides them with credentials to the challenge account and trader’s dashboard
- The trader starts trading using the firm’s trading platform and tries to hit the profit target, which is a percentage of the funded amount
- A trader passes the challenge and the firm gives them the real funded account
- Trader starts making and withdrawing profits
With this flexible structure, both traders and prop firms have an opportunity to share capital and knowledge and make profits. Prop firms attract profitable traders and keep a portion of profits, while prop traders can use the firm’s capital for trading purposes and withdraw profits. One distinctive advantage of prop trading is that it offers significantly more trading capital than what an average trader can afford, sometimes in hundreds of thousands. So, prop firms attract talent, and prop traders access financial markets using large funded accounts.
Prop Trading Rules
Prop firms have various rules and risk limits to protect their capital. The vast majority of prop trading firms restrict their traders from losing more than a certain percentage on any trading day. This is a daily loss limit and, together with maximum limit rules, creates a key defense for prop firms. Here is the list of top rules imposed by prop firms to protect their capital and only select the most talented traders:
- Daily loss limit – the percentage of how many traders can lose on any given day
- Maximum drawdown – the maximum amount of losses overall
- Profit target – percentage of profits traders have to hit to pass a challenge
- News trading – many prop firms restrict traders from trading during major economic news releases
- Overnight and over-the-weekend positions – prop firms might also restrict traders from holding positions overnight and or over the weekends
As for other rules, it all depends on the prop firms and funded account type. There are several account types for funding challenges, instant funding, 1-stage evaluation, and 2-stage evaluation accounts. Instant funding grants immediate access to trading capital and allows traders to start making and withdrawing profits right away. 1-step evaluation accounts allow traders to just hit the profit target without breaching rules and get funded accounts, and 2-stage accounts require traders to pass several challenges before they are qualified to trade on funded accounts. Depending on the trader’s experience, 1-step evaluation accounts are the most attractive where traders can show their performance and then start making profits and withdrawals.
EAs explained
Expert Advisors or EAs are automated trading systems developed for platforms like MetaTrader 4 and 5. Since the majority of prop firms provide these platforms, EAs can be a great help for pro traders to not only pass evaluation challenges but also make profits without spending a long time before the screens. EAs are a great way to automate most trading processes, and they can be used to create alerts and send them by email or SMS. EA alerts can be greatly helpful, not missing trading setups. However, the main power of EAs lies in their capability to fully automate trading without human interruption.
Types of EAs Used in Trading Challenges
EAs can use diverse trading strategies depending on the developers, but not all of them can be used in prop trading challenges. Some EAs are riskier and could breach daily loss and maximum drawdown risk rules. Especially martingale and grid trading robots are especially highly risky. Here are some of the most popular strategies implemented in EAs that can pass evaluations.
Trend-based EAs
These EAs are programmed to follow market trends and make profits during sustained movements. Using indicators such as moving averages or ADX, trend-follower EAs aim to enter and exit trades in the direction of the main trend and make profits along the way. These types of EAs could be especially effective in prop challenges where the main aim is to maximize profits over longer periods of time.
Counter-trend EAs
Counter-trend EAs are mainly swing trading bots trying to catch reversals, which occur more often than trends. These EAs typically use oscillators such as RSI or CCI to pinpoint potential turning points in price movements. This strategy is beneficial in volatile markets, where price swings up and down are happening constantly.
Scalping EAs
These EAs execute trades quickly to capture small price gaps, making numerous trades in a day to accumulate a significant total profit. Scalping is highly effective in prop trading, as it allows traders to quickly gain profits and hit the profit target. Scalping strategies also tend to have higher win rate percentages, reducing the stress of losses.
Benefits of Using EAs for Prop Trading Challenges
There are several distinctive benefits of using EAs in prop trading and general financial trading.
Consistency and discipline
EAs operate under a defined set of rules called algorithms. They execute these rules without deviation, ensuring high levels of discipline and consistency. This is critical for meeting strict challenge criteria such as daily risk limits, profit targets, and maximum drawdown. EAs eliminate human errors and emotional decisions, which is a main advantage.
Efficiency
EAs can analyze vast amounts of data and execute trades at speeds that can not be rivaled by human traders. This rapid response capability is essential for taking advantage of trade setups that meet the challenge criteria efficiently and effectively.
Emotionless Trading
EAs are algorithms executed by computers and they do not have emotions. The ability to completely remove emotions from trading is probably one of the most distinguishing features of EAs. This increases consistency and if the algorithm is advanced and tested well, EAs can hit profit targets consistently.
Backtesting and Optimization
Traders can use historical data to backtest EAs on several years of data. This allows EAs to be well-prepared for various market scenarios and adapt their strategies accordingly.
Strategies for Selecting the Right EA for Your Prop Challenge
EAs can be powerful tools to fully automate prop trading. However. If the wrong EA is selected, then losses are guaranteed. This is because of prop firms’ strict risk limit rules that the majority of EAs were not designed to adhere to. There are several other aspects to consider for selecting profitable EAs. Traders need to understand the trading strategy that their EA uses for trading. This will allow traders to tweak the settings and properly control risks. Knowing what strategy your EA uses is also important to rule out risky strategies such as martingale and grid trading. Some prop firms also prohibit certain strategies such as hedging and arbitrage, and selecting EAs that follow strict risk management rules and are not using any of the strategies mentioned is critical. So, how do you select EA strategically? First of all, write down daily and maximum risk limits, prohibited strategies, and in case of mandatory stop loss the minimum stop loss amount. Now you can search the web for proper EAs, select at least 5 of the successful EAs that have their performance checked on real accounts, and have verifiable results on Myfxbook. Now try to understand tradings strategies behind their EAs and check they align with your prop firm’s allowed methods. The next thing is to check if the selected EA’s risk management methods align with the prop firm rules. Select the EA with the least risk and drawdown to ensure you won’t breach the maximum drawdown rule.
Practical Tips for Optimizing EAs
Here is a list of the best tips to optimize your prop firm EA:
- Backtesting — testing EA’s performance on historical data is the first step to start optimizing EAs
- Parameter optimization — tweak the EA to understand how different parameters affect the test results, beware of overfitting
- Risk management — use appropriate risk limits including position size and stop loss order sizes to limit your risks
- Continuous monitoring — monitor your EA’s performance continuously and ensure it functions as it should
Conclusion
Expert Advisors (EAs) can be invaluable tools for navigating the stringent requirements of a prop firm. EAs can automate trading strategies and make profits without emotions, enabling investors with limited time and experience to trade on large funded accounts for profits. Selecting the proper EAs for profitable prop trading can be tricky, as it requires thorough understanding of prop firm rules and comparing it with the EA’s trading strategy to ensure the EA won’t break any hard rules. Backtesting and tweaking EAs can also be very important to ensure optimal performance.
