Prop Firm Rules Explained: How to Pass Your Challenge and Stay Funded

If you're an active trader but new to the prop trading space, it can feel slightly overwhelming. With multiple firms offering different rules and structures, choosing the right one can be challenging. Moreover, the rules may seem strict and unforgiving. But they are actually designed to protect both you and the proprietary trading firm.

Likewise, if you're brand new to trading and you want to jump straight into prop trading, you need to understand how prop trading works and the specific prop firm rules that govern it. The reality is that most prop firm traders fail because they don’t fully understand or adhere to the prop firm rules.

Once you understand the rules, you give yourself a better shot at actually passing the prop firm challenge and getting funded, setting your trading journey on a path toward sustainable profitability.

What is the Evaluation Process for Funded Accounts in Prop Trading?

So, when it comes to prop firm trading, there are two primary parts to it. The first part is getting funded. The second part is staying funded. Let’s chat about the first part here, which is getting funded. As a general rule, this is done by passing an evaluation process.

The goal of the evaluation process is for firms to identify skilled traders who can operate within clear risk parameters, separating them from those who rely on luck or reckless strategies. You’ll need to manage a demo account under specific guidelines and rules, usually using the firm’s approved trading platforms.

While doing this, you’ll need to hit profit targets and manage your risk. Then, if successful, the firm will fund your account. It’s a bit like an extended job interview, but for traders.

The majority of prop firms structure their evaluation in two phases. Phase one is usually intended to verify whether or not you can actually trade effectively. Phase two is more of a “verification” phase before you get funded. Generally speaking, phase one is the harder of the two, while phase two focuses more on consistency.

Some firms, like Seacrest Markets offer 3-step plans. Click here here to view our available challenges.

What are the Common Rules in Prop Trading Firms for New Traders?

When it comes to the actual trading rules implemented by prop firms, here are some of the most common.

Time to Complete Evaluation

Some prop firms have a deadline by which you need to complete the evaluation. Generally, it will be around 30 days for the first phase, and 30-60 days for phase two. If you fail to complete the evaluation within the given time, you won’t pass it, regardless of how successful your actual trading results have been. However, Seacrest Markets offers no-time-limit evaluations, so you can take your time to conduct thorough market analysis and wait for the right setups before entering a trade.

Minimum Profit Targets

Profit targets only apply during the evaluation and verification phases. Generally, minimum profit targets sit at about 8%-10% during the evaluation phase and about 4%-6% during the verification phase. So, these targets need to be achieved during the specific phase, whether it be the evaluation or verification.

The profit targets for the verification phase are normally lower, due to the prop firm being more interested in consistency, rather than proving you can actually make money, which the first phase is slightly more focused on.

Drawdown Limits

Prop firms implement what’s known as drawdown limits. These are basically the maximum amounts of money you can lose when trading. There are two primary types of drawdown limits: maximum drawdown and daily drawdown.

Maximum drawdown refers to the maximum amount of capital you can lose overall. The maximum drawdown is typically between 8 and 12%. This can either be implemented on the starting capital or on the highest account value achieved.

So, if the maximum drawdown was 10% on the starting value, and the starting value was $100,000, the account value should not dip below $90,000; otherwise, you risk account termination due to an account breach. Assuming your account grew to $110,000, and the maximum drawdown was applied to the highest account value, your account value would not be allowed to drop below $99,000.

The goal of drawdown limits is two-fold: protect the firm and instill good risk management behaviour in the prop traders.

Minimum Trading Days

Prop firms almost always have a minimum trading day requirement. This means you have to trade a minimum number of days during the evaluation phase. The number of trading days is usually around 5-10 days. However, opening multiple trades on a day only counts as one trading day.

Having this rule in place helps weed out traders who may have just gotten lucky or who may have caught the market at a good time. By requiring sustained trading activity over multiple days, prop firms can better assess whether you have a genuine edge. Prop firms are looking for consistent traders who have a repeatable strategy with a viable edge – not someone who just got lucky.

News Trading Restrictions

If you understand the financial markets, you'll know that news can move the markets in an instant and dramatically shift market trends. Because of the uncertainty and volatility around news, most prop firms have restrictions on news trading.

Rules vary per firm, but common setups include:

• No trading a few minutes before or after the news
• The restriction may apply to new or existing trades
• Some firms allow trades opened before the restricted window to remain open
• All positions to be closed before the news hits

Seacrest Market’s news trading rules are rather lenient. Here’s how Seacrest Markets handles news trading:

• Challenge Phases: No limits - trade, hold, or exit as you like
• Live Sims: Restrictions for "Red Folder/Red Label" news (per Forex Factory). You are not allowed to open or close a trade 3 minutes before or 3 minutes after the News release.
• Soft Breach Only: Violations deduct profits from affected trades, but don't close your account.

Copy Trading

Copy trading means mimicking trades from another trader, signal service or account – instead of making your own trading decisions. Most prop firms completely ban this, since it defeats the whole purpose of the evaluation, which is to test your own trading skills.

Here’s what prop firms do to catch these types of trades:

• Look for identical entry and exit prices
• Watch for similar position sizes and financial instruments
• Identify trades placed within seconds of each other

Generally, if a strategy relies on copying someone else’s trades, it probably won’t survive long-term in a prop firm environment.

How Do Profit Splits Work in Prop Trading?

Prop firms are designed around the idea of a mutually beneficial relationship. The firm provides the capital, and you share your profits with them. Normally, these profit share arrangements are 70/30 or 80/20 in your favor. You keep majority of the profit, while the firm takes the smaller portion.

Some firms will increase the share of profit you receive as your capital grows and you may eventually end up taking up to 90% of the profit home, depending on the specific prop firm arrangement.

What is the 2% Rule in Trading?

The 2% rule is not only something many prop firms require as a rule, but more of a guideline all traders are encouraged to follow. you should never risk more than 2% of your account value on a single trade.

So, if you have a $100,000 account, you should not risk more than $2,000 on any single trade. To clarify: this doesn’t mean you should not trade with more than $2,000; it means if the trade goes against you and hits your stop loss, you shouldn’t stand to lose more than $2,000.

Many traders stick to risking no more than 1% of their capital on any trade, which is even more conservative than the widely suggested 2% rule. Especially with a prop firm’s strict trading rules, it’s good to err on the side of caution.

What is the 3-5-7 Rule in Trading?

The 3-5-7 rule in trading comes from the idea that traders should keep single-day profits to 3%, avoid pushing 5% or more – even in strong sessions, and almost never go beyond 7%. This might sound strange, but the thinking is that big winners are not sustainable and rely more on luck and “hitting it big.”

Obviously, prop firms want to see consistency in your trading. So, a lot of prop firms apply a consistency rule, capping how much of your total profit can come from a single trading day. The number is usually around 30%-50% during the evaluation phase. So, although the numbers are flexible, the concept stays the same. The principle is that prop firms want to ascertain if you’re a consistent trader, or just a lucky one.

Building a Prop Firm Trading Plan

It should be clear by now that being a good trader may not always translate into being a good prop firm trader. Because of the specific rules around prop trading, you need a strategy built around these rules. If not, you could struggle to pass the evaluation, let alone stay funded. But, if you’re aware of the rules around prop trading, you can build – or tweak your strategy around them.

Good risk management remains a key focus, and you should not risk more than 1-2% of your capital per trade. This isn’t just smart trading; it helps you stay on the right side of the prop firm rules. When it comes to profit-making, small, repeatable wins and consistent profits matter far more than occasional big trades. Stick to trading during regular market hours and avoid weekend trading unless your firm explicitly allows it, as poor liquidity conditions rarely produce quality setups.

You’ll also want to document your trades meticulously, so you can keep track of where you’re falling short, and what you need to do to get – or stay on track. This keeps you accountable during the challenge and provides valuable data for refining your approach.

Common Mistakes Experienced Traders Avoid in Prop Trading

If you’re going to succeed at prop trading, you’ll need to recognize and avoid some of the common pitfalls that trip up traders.

Here are some of the most common ones:

Not understanding the rules

It’s vital to understand the rules of the prop firm. What are the restrictions around news trading? Is there a time limit to completing the evaluation? What are the rules around trading consistency?

You should know the answers to all these questions, and write them down for clarity and to ensure they don’t trip you up – even accidentally.

Chasing profit targets too aggressively

Sure, you have profit targets to hit, but chasing them too aggressively could result in you blowing up your account. Rather, aim for small wins and consistency, which is what prop firms want to see anyway.

Also, avoid revenge trading or forcing trades when they aren’t there. These mistakes almost always end up costing you in the long run.

Ignoring drawdown limits

Bad risk management will cost you in prop trading. This is why you need to manage position sizing and implement both stop-loss and take-profit orders. Know what the daily and max drawdown limits are, and monitor them closely.

If you’re on a good run of trades and are on target with your profit target, one reckless trading day can still cost you. So, watch these levels closely.

Building a Prop Trading Career using a Firm's Capital

In reality, prop firm trading should not be too different from normal trading. Many of the same principles that make a successful trader apply to whether you’re trading your own capital or the prop firm’s capital. Good risk management, a repeatable, consistent strategy and managing your losses are all guardrails that protect your account.

Choosing the right prop firm upfront makes a significant difference. When you're trading using a firm's capital, you do need to be aware of the nuances around specific rules and limitations, like news trading and time to complete your evaluation. Beyond these, just take your time to build a good trading strategy and manage your risk, and you’re already on a good path to getting – and staying funded. Seacrest Market's unlimited trading period gives you room to fine-tune your trading strategy. Explore our challenge options here.

Here is a handy checklist you can use before starting a prop firm evaluation:

Pre-Evaluation Checklist

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