In trading industry, prop firms are attractive opportunities for excellent traders to trade in financial markets with significant amounts of money without making any capital investment on their part. Before having a chance to utilize the firm’s capital, however, traders have to go through a rigorous evaluation process. One of the widely used evaluation models is the 2-Step Challenge, a format that most prop firms use to evaluate the skill and consistency of a trader.
In this in-depth article, we will take you through the 2-Step Challenge and offer tips that will guide you through the test to get a funded account.
What is the 2-Step Challenge?
The 2-Step Challenge involves a two-phase evaluation in which the strategy, risk management, and trader consistency are measured. The Challenge is an orderly process whereby the ability of the trader to profit while complying with certain rules provided by the prop firm is tested. Traders will be awarded the opportunity to trade using the firm’s funds only if they are able to complete both stage one and stage two
Step 1: The Challenge Period
During Step 1 of the 2-Step Challenge, the traders must achieve a set of performance standards within a defined time period(Some prop firms offer unlimited time), usually between 30 and 60 days. Step 1 is intended to challenge the skill of the trader to generate profits while staying within the risk management parameters of the firm.
Some of the most important elements of Step 1 are .
Profit Target: The trader has to achieve a target profit, usually 8-10% of the initial balance. The target is usually calculated based on the initial account balance used for calculation.
Drawdown Limits: Prop firms also have both daily and maximum drawdown limits to ensure that traders are handling risk effectively. The daily drawdown limit is usually between 2-5%, and the total drawdown limit is between 10-12%.
Trading Period: There is a specific time frame of days (preferably between 30 and 60 days or sometimes unlimited time) given to the traders to reach the target profit. The traders must not cross the drawdown limits but should try to make the mandatory profit.
No Trading Limits: Traders during this stage generally have a free hand to trade any asset class that the prop firm puts forth, be it forex, equities, commodities, or indices.
Clearers of this level move on to Step 2, where they are subjected to a more stringent evaluation process
Step 2: The Verification Phase
The second step of assessment is referred to as the Verification Phase. The step is a “final test” in which the traders are required to show that they can maintain profitability and follow risk management rules for a longer period of time.
Here, the rules are less rigid than those of the Challenge Phase but still need discipline and skill. The major elements of Step 2 are:
Profit Target: The profit target in the Verification Phase is typically lower than that of Step 1. Nevertheless, the traders must demonstrate that they are capable of delivering stable returns with little risk-taking.
Drawdown Rules: Similarly, in Step 1, there are also extremely strict drawdown rules that need to be adhered to by traders. Yet, the highest level of drawdown may be applied liberally in relation to Step 1.
Timeframe: Traders have a broader timeframe, approximately between 30 and 60 days, for reaching the specified profit without exceeding drawdown levels.
Once this level is passed, traders are typically provided with a funded account, i.e., they can trade using the firm’s funds and receive a portion of the profit earned.
Tips to Success in the 2-Step Challenge
Read the Rules: It is very important to read and understand the rules and guidelines given by the prop firm prior to beginning on the evaluation process. Each firm will likely have slightly different guidelines for profit targets, drawdown levels, and time intervals. Reading them will be helpful in managing your trading strategy in the right way.
Risk Management Mindset: By far the most important aspect of actually finishing the 2-Step Challenge is a good risk management mindset. Certain prop firms will cancel profitable traders who are very risky. Be consistent and stick to your risk management strategy and don’t take large pieces of your money on one trade.
Trade with a Plan: To pass the test, you must have a definite trading plan. Whether you trade based on technical analysis, fundamental analysis, or both, having a plan will lead you through the market with confidence and discipline. Avoid impulsive trades that can ruin your account.
Start Small and Gradually Increase: In the beginning, it is advisable to trade small positions so that you do not have a large risk. As you become comfortable and confident with your system, then you can gradually increase your trades. This allows you to operate within the drawdown limits as you become comfortable during the testing period.
Be Patient: The 2-Step Challenge may take years to accomplish, especially if you are using tight risk control. Do not hurry to hit the profit targets; focus on gradual growth and steadiness. Discipline and patience will increase your hit rate.
Practice on a Demo Account: Practice initially on a demo account if you are not familiar with the evaluation process before taking the real test. It will make you familiar with the rules, strengthen your strategy, and familiarize yourself with trading dynamics in the prop firm universe.
Keep Emotions in Check: Emotional control is critical in navigating the evaluation process. Fear and greed are responsible for poor decision-making and avoidable losses. Be disciplined to your trading plan, and emotions should never dictate trading choices.
Conclusion
Reaching the 2-Step Challenge can lead to a potentially rewarding career as a prop firm’s capital trader. Traders can succeed through the understanding of the process of evaluation, risk management principles, and self-discipline. Passing the challenge is not just about generating massive returns within a limited period but in providing consistency, self-discipline, and capability in handling your trades and risks. Through persistence and patience, you can manage to pass the 2-Step Challenge and attain a funded trading account with a respected prop firm.
