How to pass the challenge of using latency arbitrage at a Forex prop-firm

What is proprietary forex trading

An alternative to trading forex with your own funds through brokers is proprietary trading with funds from a prop firm.

A forex proprietary firm is a company that evaluates a trader’s skills (usually through a trading challenge) and assigns a certain amount of its own capital for the trader to trade with. The purpose of the challenge (evaluation period) is to find out if the trader is qualified enough and can work according to the rules of the company as far as money management is concerned. Trading with a proprietary firm usually involves paying some sort of fee, whether it is an entry fee to go through the evaluation period or a monthly fee to continue to trade the firm’s funds and make some profit. This type of trading only makes sense if the positives outweigh the negatives in your particular case, as proprietary trading is definitely not for everyone.

Advantages of trading with proprietary firms

  • Relatively easy to get funds to earn profits.
  • Strict risk management rules help you stay on track and avoid most of the psychological mistakes made by forex traders.
  • A wide variety of proprietary firms to choose from.
  • Some of these firms offer quality educational materials and useful tools for trading.
  • Since prop traders trade on demo accounts, trading conditions and country-by-country availability are not limited by forex regulators.

Disadvantages of trading with proprietary firms

  • Built-in conflict of interest – it is advantageous for a proprietary firm to receive as many fees as possible from each trader.
  • The requirement for minimum trading volume and minimum profitability, short maximum position holding period, and restrictions on trading on the news push the trader to a very short-term trading style.
  • Probation can be a waste of time and money for traders who could successfully trade with their own funds using the strategies that suit them personally.

Can latency arbitrage be used to trade at a proprietary company?

Almost all prop companies prohibit latency arbitrage as well as news trading to pass checks. Even if these points are not spelled out in the terms of trade, I do not recommend using latency arbitrage in its pure form. Nor does using hedge arbitrage bring results. Yes, proprietary companies are “slow” and when you trade with a fast broker, the profit will eventually accumulate on the slow broker, i.e. on the proprietary account, but you run the risk that the hedged pair can go into negative equity and thus violate the rules of the proprietary company’s checks. The same problem can occur when using lock strategies like 2-legs Latency 1 – 2-Legs Latency 3 in two different accounts. For this reason, we gradually come to the conclusion that the only correct solution is to use the lock strategy in one account, thus narrowing the choice between three strategies 2-legs Latency 1, 2, or 3. Naturally, the choice falls on 2-legs Latency 1 because it is the only strategy that is the most effective for working on one account. Many proprietary companies require using hard stop loss, and this feature is implemented in 2-legs Latency 1.  I would like to immediately note that there is a possibility of the use of anti-arbitrage plugins by competition companies on all demo accounts and on such accounts, this strategy will not show effective results. If the prop company does not apply the plugin, then we recommend not to show fabulous profits and work within the conditions of the company. I.e. if you need to earn 10% a month in order to pass the account, there is no need to earn 20%, because this will attract unnecessary attention to you. Before you start trading and setting up a strategy, read all the rules of change of the prop company where you are registered, and only then perform the setting with all the requirements taken into account. Start trading with the minimum lot and one or two instruments in order to see what the execution time and slippage are. If the slippage with the minimum lot does not “kill” the profit received from the arbitrage trading, try the other trading instruments, and after that start to increase the trading lot. You need to choose the lot size and trading instruments on the basis of the minimum profit threshold in a given proprietary company.

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