Prop-firm rules explained: daily loss, max drawdown and the rules that fail most traders
- How prop-firm challenges and funded accounts work
- The rules that end most accounts, and how each is measured
- A simple routine to stay inside the limits
How a prop firm works
A proprietary trading ("prop") firm lets you trade its capital for a share of the profits, often 70–90%. First you pass an evaluation (a "challenge"), usually by reaching a profit target without breaking any rule. You pay a fee to take it. Pass, and you get a funded account. Break a rule at any point, and the account is closed.
Most traders who fail don't fail the profit target; they break a risk rule. Every firm's rules differ, so read yours carefully. The numbers below are typical, not universal.
The rules, one by one
- Profit target. Often 8–10% in phase 1 and around 5% in phase 2 of a two-step challenge.
- Daily loss limit. Often 5%. The key detail is how it's measured: from the day's starting balance, or from the higher of balance and equity at the day's start. Floating losses usually count. The "day" resets at a set server time.
- Maximum loss. Often 10%. Static: measured from your starting balance, so the floor never moves. Trailing: the floor rises as your account makes new highs, so profits you give back count against you.
- Minimum trading days. Some firms require trades on a set number of days.
- Consistency rules. Some firms limit how much of your total profit can come from one day or one trade.
- News and weekend rules. Some forbid trading around major news or holding over the weekend.
- Lot size and strategy rules. Maximum position sizes; bans on certain strategies (e.g. high-frequency, latency arbitrage, or opposite trades across accounts).
- Copy trading. Many firms allow copying between your own accounts but forbid copying other people's trades or trading the same signals as other customers. Check before you connect a copier.
The trap of the daily limit
Example: a $100,000 account with a 5% daily limit can lose at most $5,000 in a day. Three trades each risking 2% are $6,000 at risk, more than the limit, even though each trade looks "small". If they all go wrong together (for example, all three trade against the dollar during news), the account is gone in minutes.
A routine that keeps you inside
- Risk 0.5–1% per trade on a challenge. Passing slowly beats failing fast.
- Set a personal daily stop at half the firm's daily limit, and stop trading for the day when you hit it.
- Count open risk, not just closed losses: the total of all stop losses if everything went wrong.
- Check the news calendar each morning, and the firm's rules about it.
- Write the firm's rules on one page and keep it in view while you trade.
- Not knowing whether the maximum loss is static or trailing.
- Counting only closed trades towards the daily limit, while open losses also count.
- Connecting a copier without checking the firm's copy-trading rules.
How this works when you copy trades
Check yourself
- Most challenges are failed on risk rules, not on the profit target.
- Know exactly how the daily limit and the maximum loss are measured.
- Trade smaller than you think on a challenge, and keep a personal daily stop.