Prop Firm investment is known as one of the most profitable low-capital investment methods that attract traders of all levels. In addition to offering funded accounts with attractive capital, Prop Firms also provide traders with scaling programs with profit-sharing rates of up to 90%. This allows traders to easily increase their profits and earn impressive income.
In today’s article, Pfinsight.net will help you explore the most effective scaling plan rules in Prop Firm investing. Let’s dive in!
What are scaling plan rules?
A Prop Firm’s scaling plan is a strategic roadmap that outlines how a trader will gradually increase trading capital and risk exposure over time. By granting traders access to the company’s capital, proprietary trading firms – also known as prop firms – allow them to trade larger amounts of money than they could using only their own funds.
A scaling strategy details how, depending on performance, a trader transitions from managing a small initial allocation to handling a much larger amount of capital.
To grow within a proprietary trading firm, traders must have a scaling strategy. By ensuring capital increases are implemented sustainably, they reduce the likelihood of significant losses that could jeopardize their standing and reputation with the firm.
Prop Firm scaling strategies
Fixed scaling plan
A trader using a fixed scaling plan can only increase the size of their account up to a specific level determined by the funded account’s earnings, unaffected by other factors. At the end of each trading session, the trader has the option to request a profit share.
To scale up the size of your account, the firm pays you 80% of the profits and adds the remaining amount before withdrawal.
Since traders know exactly how much scaling and profit they can utilize, this method provides consistency and predictability. With fewer large fluctuations in capital, risk management becomes easier.
On the other hand, if a trader consistently exceeds their initial allocation, the fixed scaling strategy may limit their ability to access additional capital.
Performance-Based scaling plan rules
Under a performance-based scaling plan, the trader’s initial and subsequent capital allocations are determined by their trading performance. Traders who consistently demonstrate profitability while using low-risk strategies will be granted additional funding.
Because successful traders gain access to larger amounts of capital, this approach incentivizes them to achieve peak performance. It also promotes disciplined trading methods and strong risk management.
However, traders experiencing drawdowns or losses may find performance-based scaling plans challenging to maintain.
Tiered scaling plan
A tiered scaling strategy combines elements of both fixed and performance-based plans. Traders start with a fixed initial capital allocation and progress through tiers to access larger capital amounts as they demonstrate trading skill and consistency.
The drawback of a tiered scaling strategy is that traders may feel pressure to continually hit performance targets to move up to higher tiers. This can be challenging, and even highly capable traders may need support to advance.
Risk-Adjusted scaling plan
Managing risk relative to a trader’s performance is the primary goal of a risk-adjusted scaling strategy. This approach considers the trader’s risk-adjusted returns in addition to raw profits, ensuring traders are not rewarded simply for taking excessive risks.
Funded Trading Plus, for example, uses this form of scaling plan. It allows your account to grow to a new size and adds profits from the previous level while implementing a trailing drawdown limit.
This strategy encourages traders to prioritize consistency and risk control within their trading tactics. For both the trader and the firm, this can lead to more stable and sustainable trading operations.
However, implementing risk-adjusted scaling plans can be complex, involving data analysis and sophisticated risk evaluation algorithms. Additionally, traders may struggle to fully understand how their risk-adjusted returns are calculated.
Prop Firm Scaling Criteria
Achieving profit targets is great, but proprietary firms consider more than that when deciding whether to scale your account. Before you can open a larger trading account, you must meet several key trading requirements.
Minimum trading days
Before increasing the balance in your account, many proprietary firms want to see that you have actively traded for at least 10, 15, or even 30 days. Even if you hit your profit target, scaling will not occur unless you complete the required trading days first.
Some firms also evaluate how you distribute your trades throughout the month. They prefer to see a few consistent trades each day rather than a burst of activity all at once. This approach helps differentiate sustainable traders from gamblers seeking quick profits.
Consistency in trading
Proprietary firms must ensure that you can maintain steady profitability before entrusting you with more capital. You must demonstrate that you can handle the increased responsibility and pressure that comes with scaling your account.
Prop firms understand that a $100,000 scaling plan and a $25,000 initial allocation involve very different trading dynamics. It is essential to continue adhering to risk management procedures to maintain stable performance, as firms may choose not to upgrade your account if they observe a decline in your performance after scaling.
Typical Trading Rules
Prop firms use guardrails to ensure traders comply with risk parameters and stay on track for success – especially as account sizes grow. While criteria vary between firms, they often follow a similar framework.
- Daily drawdown limits: These are designed to restrict losses to no more than 5% of the account’s value in a single day. Reaching this limit could put your account at risk of closure.
- Maximum drawdown limits: These typically cap the total loss allowed from the trader’s highest account balance; exceeding this limit can result in account termination.
- Overnight or weekend positions: Holding positions overnight or over weekends is often restricted due to numerous potential market-moving events between sessions. However, firms may relax or allow certain restrictions if you have demonstrated consistent profitability.
- News event restrictions: Because prices can shift dramatically during major news releases, news traders are often restricted from trading for 2 to 10 minutes around high-impact news events. Due to the unpredictable nature of news, proprietary firms often view news traders as risk-takers or gamblers.
- Instrument restrictions: These are common – especially for highly volatile instruments such as Bitcoin. As traders advance to higher account levels, these restrictions may become less strict.
As you progress through scaling levels, additional restrictions may be introduced, and previously listed rules may either be tightened or loosened.
Conclusion
The above provides a complete overview of scaling plan rules. Hopefully, this article has given you the most comprehensive insights. Don’t forget to visit our website for more valuable updates. Wishing you success in your trading journey!