Top 7 strategies for prop trading every trader should know
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Prop trading, short for proprietary trading, involves trading a firm’s capital rather than personal funds. In exchange for providing this capital, prop firms take a share of the profits. This model allows skilled traders to scale their strategies without risking their own savings.
However, trading with someone else’s capital comes with strict rules and expectations. To succeed in prop trading, traders must use strategies that generate steady profits while keeping risk under control. Fred Harrington from Vetted Prop Firms joins us with seven proven trading strategies that align with the demands of prop trading:
1. Scalping for quick profits
Scalping is one of the fastest-paced trading strategies used in prop firms. It involves executing multiple trades throughout the day, aiming to profit from tiny price movements. Trades are often held for just a few seconds to a few minutes.
This method works best in highly liquid markets where spreads are low and execution is fast, such as major forex pairs or large-cap stocks. Prop traders who scalp need to be quick thinkers, as decisions must be made in real time without hesitation. The goal is to stack small profits that add up over dozens of trades in a single day.
Scalping requires a calm mindset, excellent technical analysis skills, and a reliable trading platform to minimise slippage and delays.
2. Day trading within market hours
Day trading is another popular strategy in prop trading firms. Unlike scalping, day trading involves holding positions for several minutes to a few hours, but all trades are closed before the market closes.
This approach helps traders avoid overnight risks, such as price gaps caused by news that breaks after market hours. Many prop firms prefer day trading because it allows them to control risk better and monitor performance daily.
Successful day traders use charts, technical indicators, and market patterns to identify entry and exit points. They also stay updated on economic calendars to avoid unexpected news that could disrupt the market during their trades.
3. Swing trading for larger market moves
Swing trading focuses on capturing price movements that happen over several days or even weeks. Unlike scalping and day trading, swing traders hold positions for longer periods, aiming to profit from sustained market trends.
Some prop firms allow swing trading for experienced traders who have proven their ability to manage risk over time. This strategy works well during trending markets where prices move steadily in one direction.
Swing traders often rely on technical analysis tools such as moving averages, trendlines, and support-resistance zones. They also need to manage overnight and weekend risks carefully by using stop-loss orders and adjusting position sizes.
4. Momentum trading during high volatility
Momentum trading is based on the idea that assets moving in one direction with high volume tend to continue in that direction for a while. Traders look for strong price moves triggered by news, earnings reports, or economic data.
Prop traders often use momentum strategies during the market opening hours when liquidity and volatility are at their highest. Momentum trading requires quick execution and the ability to spot potential entries before the rest of the market reacts.
To manage the risks of momentum trading, it’s crucial to use trailing stops and exit before the market reverses sharply. Timing is everything in this strategy.
5. Mean reversion strategies
Mean reversion is based on the principle that prices tend to return to their average levels after extreme moves. Traders using this strategy look for situations where an asset’s price has moved too far from its normal range.
Indicators such as the Relative Strength Index (RSI), Bollinger Bands, and moving averages help identify overbought or oversold conditions. Once traders spot a stretched market, they take positions expecting the price to revert back to its mean.
In prop trading, mean reversion works well when markets are range-bound rather than trending. However, this strategy requires patience and strict stop-loss management because extreme price moves can last longer than expected.
6. Breakout trading for new trends
Breakout trading involves entering the market when the price moves beyond a key support or resistance level. These breakouts often signal the start of a new trend, giving traders the chance to ride significant price moves.
Prop traders use this method to catch market momentum at the earliest possible stage. Breakouts are typically confirmed by increased trading volume, which indicates strong market participation.
To reduce the risk of false breakouts—when the price briefly moves beyond a level and then reverses—traders often wait for a retest of the breakout point before committing to a trade. Breakout trading is especially effective during news events or at the start of major market sessions.
7. Trading around news events
News-based trading involves placing trades based on real-time economic or political events that affect the markets. Traders monitor news feeds and economic calendars for events like interest rate decisions, employment reports, and corporate earnings announcements.
Prop traders often engage in news trading because these events create large price movements in a short time, offering significant profit opportunities. However, trading during news releases also comes with risks, such as wider spreads and slippage.
To succeed with news trading, traders need fast execution, a solid understanding of how different news impacts the market, and a strict risk management plan to handle unexpected volatility.
Risk management is non-negotiable
All seven strategies mentioned require careful risk management. Prop firms impose strict rules to protect their capital, including daily loss limits, maximum drawdowns, and trading guidelines. Traders must follow these risk parameters to maintain their funded status and avoid losing their accounts. For a deeper look into how these trading limits work and whether prop trading is a good fit for your trading style, you can read this detailed guide on how to determine if prop firm trading is right for you.
Using stop-loss orders, proper position sizing, and limiting exposure to high-risk setups are essential practices. Risk management is not just about protecting the firm’s money—it’s about building consistency and longevity in a trading career.
Psychological discipline is key
Prop trading also demands strong mental discipline. Traders must control their emotions, stick to their strategies, and avoid impulsive decisions. Successful prop traders know how to handle losses without panicking and how to stay focused during winning streaks without becoming reckless.
Consistency is the mark of a professional trader. It comes from having a clear plan, following set strategies, and managing both risk and emotions effectively.
Wrap up
Succeeding in prop trading requires more than just market knowledge—it takes a mix of proven strategies, risk control, and emotional discipline. Whether you choose to scalp, swing trade, or trade breakouts, the key is to apply your strategy with precision and patience. By mastering these seven strategies, traders can build a solid foundation for long-term success in the world of proprietary trading.