Last Updated on December 3, 2024
Becoming a funded trader is a significant achievement for most aspiring individuals interested in making it in the financial markets. It opens doors to a professional trading career with minimal risk and sufficient capital, allowing the best and brightest to scale their strategies seamlessly. However, the road to securing funding can be filled with challenges. Without proper preparation, traders risk falling into common traps that can hinder their progress and complicate their journey.
To help you master the journey of becoming a funded trader, we have listed the top pitfalls to avoid, as well as how to navigate each one successfully.
1. Overlooking the Importance of Having a Solid Trading Plan
Many traders mistakenly believe that trading success comes down to intuition, quick reflexes, or “gut feelings.” However, the truth is that funding firms are looking for consistency, discipline, and the ability to create and follow a structured approach. A well-defined trading plan is the bedrock of any successful trading career, especially when seeking funding. Without it, you risk making emotional or impulsive decisions, which can lead to devastating losses.
To avoid this pitfall, make sure to:
Create a Comprehensive Plan
Your plan should detail your strategy, risk tolerance, entry and exit rules, and position sizing. The best plans are clear enough to guide your day-to-day actions but flexible enough to adapt to market conditions.
As famous trader Jesse Livermore once said,
There is nothing new on Wall Street. Whatever happens in the stock market today has happened before and will happen again.
In that sense, having a structured plan helps you navigate recurring market patterns.
Backtest and Forward Test
Backtest your strategy over several months or years of historical data to ensure its viability across different market conditions. Additionally, forward testing on a demo account will help you refine your approach in real time and see whether it performs equally in current market conditions.
Without adequate back- and forward testing, your trading will be similar to shooting in the dark – you might have an occasional win, but it would be pure luck. Don’t forget that the best traders out there feast on data. And if you are seeking to become a funded one, this is a guaranteed way to improve your chances.
Stay Disciplined
Stick to your plan even during periods of drawdown. Paul Tudor Jones emphasizes the importance of discipline in trading, stating,
The most important rule of trading is to play great defense, not great offense.
Once you’ve crafted your plan, stick to it—even during periods of extreme market volatility. Otherwise, trading can become chaotic, reducing the chances of securing funding.
2. Ignoring Key Risk Management Principles
Adequate risk management ensures that traders can preserve capital and weather inevitable drawdowns. And a trader who is overly focused on potential profits may lose sight of the importance of risk management.
In fact, even if a trader is highly profitable, poor risk management can be a red flag in the eyes of capital providers. The reason is that reckless and aggressive trading usually isn’t sustainable in the long run, and funding firms aim for consistency. Alternatively, the traders they have funded should be able to demonstrate they can “steady the ship” and deliver during turbulent times so that firms are confident their capital will be in safe hands. In that sense, preserving capital can be seen as even more important than growing it.
Proper Position Sizing
Limit your risk on any trade to a small percentage of your total account balance (e.g., 1-2%). In Earn2Trade’s Gauntlet Mini™ and Trader Career Path® programs, this principle is vital, as it allows traders to trade multiple contracts while adhering to strict drawdown limits. That way, you can also easily prevent large losses on small trades and avoid dipping below the allowed daily loss limit, protecting your account.
Set Stop-Loss Orders
Always use stop-losses to protect your capital during periods of market turbulence. As Warren Buffett said,
Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.
Don’t forget that managing risk is critical to long-term success and limiting losses is paramount to your success in getting funded.
If you want to learn more about stop-loss orders, feel free to explore our dedicated guide. Aside from simple stop-loss orders, it is important to also consider adding trailing stop orders to your trading arsenal since they give you more freedom and control over your profit/loss trajectory.
Maintain a Strong Risk-Reward Ratio
The risk/reward ratio measures how much money you stand to make on every dollar you risk on an investment. In practice, a lower risk/return ratio is often preferable as it signals less risk for an equivalent potential gain. Here is an example – a 1:5 risk/reward ratio means you will risk $1 for the prospect of earning $5.
In theory, the greater the risk, the greater the expected return demanded. However, in practice, the truth is that it is all about balance. Funding firms won’t fancy you being too passive or too aggressive. So, a general rule of thumb that you can aim to follow is that an appropriate risk/reward ratio is usually anything above 1:3. Gravitating around those numbers would allow you not only to pursue optimal profitability but also show funding firms that you also prioritize risk management.
3. Overtrading
Overtrading is among the most common mistakes traders make, especially when they’re under pressure to meet funding evaluation targets. This is based on the belief that taking more trades will lead to faster success. However, in practice, it is the opposite. Taking too many trades leads to mental fatigue and increases the risk of making impulsive decisions that don’t align with the strategy in place.
Alternatively, consider overtrading a fast track to burnout and failure. So, here is a simple trick to help you succeed in Earn2Trade’s funded trader programs – establish a daily or weekly limit for the number of trades you place. This ensures you focus on high-quality opportunities and don’t chase every trade under the sun. Not that the latter is necessarily bad, but trading firms reward consistency over excessive activity. As mentioned already – overtrading spreads your focus thin and increases the likelihood of errors.
Furthermore, make sure to always take breaks, especially if you are going through a string of unsuccessful trades. Simply stepping away from the screen will give you mental clarity, which is crucial in trading.
4. Focusing Solely on Short-Term Results
Becoming a funded trader is a marathon, not a sprint. Many traders focus too much on quick wins, hoping to impress funding firms with large profits in a short period. However, firms prioritize consistency over short-term success. A trader who achieves a few big wins followed by significant losses is less attractive than one who demonstrates steady growth.
So, to maximize your chances of getting funding, ensure consistency. Funding firms like our partners look for traders with a steady equity curve. A gradual, stable increase in account balance is more attractive than sudden spikes in profits followed by significant losses. Funding firms want to see a trader who can handle both winning and losing streaks without major swings in performance.
Also, evaluate your performance over weeks and months. Use metrics like the Sharpe ratio, which compares the return of an investment with its risk. Alternatively, it highlights your risk-adjusted returns. It is very useful since it helps showcase whether excess returns over a period of time signify more volatility and risk rather than trading skill.
5. Poor Understanding of Funding Program Rules
Every funding program comes with its own rules and guidelines, whether it’s daily loss limits, risk guidelines, profit goals, or minimum trading days. Many traders don’t thoroughly understand these rules, which can lead to their disqualification, cutting their journey to funded trading short.
So, to make sure you don’t fall for this mistake, thoroughly read the rules of the program and ask if something is unclear.
In Earn2Trade’s Gauntlet Mini™ and Trader Career Path® programs, for example, traders must adhere to strict drawdown limits, profit goals, and daily loss thresholds. In addition, traders should follow a Progression Ladder that caps the number of contracts they can trade. Make sure you understand these rules completely before starting.
A valuable tool to help you with rules compliance is trading journals or other software where you can keep track of your performance and results. That way, you can spot patterns or be alerted timely if you are on course to breach a rule.
Last but not least, if something is unclear, reach out to the program provider. Don’t be afraid to ask questions and seek answers. For example, at Earn2Trade, we have a dedicated Help Center where you can find more info. If, after going through our guides you are still unsure about any part of the rules, don’t assume – just ask us. Remember that asking is always better than making a costly yet easily avoidable mistake.
6. Emotional Trading
Trading is as much a psychological endeavor as it is a technical one. In fact, it can be a real emotional rollercoaster of fear, greed, and frustration, especially when you’re under pressure to meet evaluation targets. Whether it’s revenge trading after a loss or doubling down on risky trades, emotional decisions rarely lead to success. That is why funding firms look for traders who can keep their emotions in check and follow their strategy.
But why don’t we hear more on this from Jose – one of our success stories who managed to successfully complete the Trader Career Path® program?
Aside from Jose’s advice, other useful tips to avoid this pitfall include learning to:
Stick to Your Plan
A well-structured trading plan serves as a safeguard against emotional decisions. If a trade setup doesn’t align with your plan, avoid it, no matter how tempting it may seem. Remember that your trading plan is your defense against emotional decisions. If a setup doesn’t meet your criteria, avoid it, no matter how enticing it looks.
Wonder what a good trading plan looks like? Here are some useful resources from our blog, covering everything from what a trading plan is to how to create one and stick to it in the long term.
Develop and Maintain Emotional Awareness
Keep a journal of your emotions during trades to identify triggers. This can help you recognize when you trade emotionally, spot patterns and avoid repeating them. Remember that the market doesn’t care about your emotions; it only cares about the decisions you make based on your strategy.
Balance Work and Life to Maintain a Healthy Lifestyle
Mental and emotional fatigue contribute to poor decision-making. In that sense, taking care of mental health is just as crucial as managing trades. That’s why making time for sleep, exercise, and relaxation is essential to maintaining a sharp mind. A good first step is learning how to create a good morning routine.
7. Not Preparing For Psychological Challenges
The mental demands of trading, particularly in securing funding, can be overwhelming, leading to emotional swings, fear, and doubt. Traders who focus solely on their technical strategies without addressing the psychological challenges may find themselves unprepared when emotions run high.
So, to avoid falling for that trap, practice techniques like meditation, deep breathing, and mindfulness to help you manage stress and stay focused.
Another helpful tool on that front is visualization. For example, try to visualize the best- and the worst-case scenarios before entering a trade. That way, you will prepare your mind for any outcome and ensure you remain calm and focused, no matter what happens next.
In addition, strive to build resilience and learn to acknowledge that losses are inevitable in trading and an important part of the journey. The ability to bounce back from losses demonstrates maturity and consistency and that you are mentally prepared to handle both success and failure with the same level of emotional stability.
Now, Let’s Get You Funding
Securing funding is a milestone that can propel your career to the next level. However, it requires more than just technical skill—it demands mental fortitude, discipline, and a deep understanding of the funding process.
Earn2Trade’s funded trader programs, The Gauntlet Mini™ and the Trader Career Path® emphasize risk management, consistency, and emotional discipline, giving you the perfect training ground to learn to successfully navigate the pitfalls on your way to securing funding.
In 2023 alone, our programs have helped traders secure over 700 funded live accounts. Ready to be our next success story?
