A prop firm often integrates a consistency rule into its rule set, but prop traders frequently oversee it when they start their prop trading challenge or trade the live account.
The problem is that failure to understand this rule can lead to immediate loss of the challenge or funded account.
That’s why it is so important to understand it before placing the first trade. Let me explain the consistency rule and provide some examples.
What is the Consistency Rule?
The consistency rule is a trading rule set by proprietary trading firms. It states that no single trading day’s profit or loss can account for a large percentage (typically 30-60%) of the overall net profit during a trading evaluation period. This prevents excessive risk-taking in a single trade.
So, let’s say you trade 5 days, and one day, you make a home run and cash in $5,000. On the other trading days, you trade breakeven. That means that your best day, in this example, represents 100% of your overall profit.
In this case, the prop firm would say that you do not meet the consistency rule requirements.
However, let’s say your prop firm has a 50% consistency rule, and you make $2,500 on your first day and $2,500 on your second day, then three days breakeven. Perfect, in this case, your best day equals not more than 50% (actually, exactly 50% in our example, but still not more), and you are good to go regarding the consistency rule.
How Does the Consistency Rule Work?
The consistency rule tracks the highest daily net profit achieved. If this exceeds the allowable percentage of the total net profit, the trader fails the evaluation. For example, if the rule is 30% and the largest daily profit is $3,000 while the total profit is $6,000, the trader violates it (3,000/6,000 = 50%).
Why is the Consistency Rule Important?
The rule promotes steady, controlled growth over aggressive, erratic trading. It ensures traders don’t risk excessive capital on a few outsized trades. Building consistency demonstrates an ability to manage risk over time professionally, a key requirement for prop firms to deploy their capital safely.
The idea is that you should show the prop firm that you manage their capital consistently over a longer time frame instead of gambling to make one big profit in one day.
The Consistency Rule for Funded Accounts
For funded accounts after passing the initial evaluation, prop firms may have different consistency rules. Some require the largest daily loss to be under a set percentage of the account balance. This encourages traders to maintain their risk management practices for the duration of the partnership.
Still, some prop firms do not have consistency rules or define their own set of parameters for what a proprietary trader must achieve to get paid.
Again, once you get started, it’s essential to read the details relevant to your challenge and live account. Keep in mind that prop firms change their details from time to time, so it’s well worth the time to read the rules.
Consistency Rule During the Evaluation Phase
During the evaluation phase before receiving a funded account, the consistency rule is typically more stringent. Traders must build the account through smaller, consistent profits without any single outlier day making up too large a percentage of gains, commonly 30% or less.
Why Is Consistency In Trading Important?
Consistency is crucial in trading because it ensures sustainable profitability over time. Every trading strategy experiences more or less profitable days. Still, consistent traders maintain discipline and stick to their well-defined trading plan regardless of short-term fluctuations in their account balance.
Consistency helps traders like you manage risk effectively by following predetermined rules for entry, exit, and position sizing.
Moreover, consistent trading stands for rational decisions based on trading strategy rather than being affected by emotions or impulsive actions.
By focusing on the process rather than the outcome of individual trades, good traders can evaluate their performance objectively and make necessary adjustments to improve their edge in the financial market.
How To Become A Consistent Prop Trader?
Developing a well-defined trading plan is crucial, and the plan should outline clear rules for entry and exit, risk management, and position sizing.
Prop traders must stick to their plan consistently, avoiding impulsive decisions based on emotions.
Risk management is another critical aspect of consistent trading, and prop traders should always use stop-losses and limit their risk per trade to a small percentage of their account.
In addition, continuously educating yourself and adapting to changing market conditions is also vital for long-term success.
Another great idea is to keep a trading journal to track the trading performance, review trades, and identify potential areas for improvement.
Lastly, patience and discipline are essential qualities for consistent, profitable trading. A good prop trader waits for high-probability setups that align with his trading strategy and resists the temptation to overtrade or chase the market based on gut feeling.
