In prop firm trading, choosing the trading style is key to passing tests and risk managing well. Prop firms provide traders with capital to trade on their account, but traders are subject to tight rules, such as profit goals, drawdown levels, and risk management rules. The trading style you choose can make a huge difference in your ability to pass these tests and become a consistent winner.

Here in this article, we will compare various styles of trading—day trading, swing trading, and scalping—and weigh their advantages and disadvantages in prop firm trading. Knowing the appropriateness and risk profile of each style will take you to an intelligent decision regarding which style best fits your risk profile and trading objectives.

What is Prop Firm Trading?

Prior to elaborating on the contrast of trading styles, one must be cognizant of the character of trading at a prop firm. Prop firms give traders capital to trade financial markets, usually in return for a share of profits gained. Prop firms, however, assess traders via a rigorous process (usually a two-step test of assessment), and there are strict guidelines that traders have to follow, such as:

Profit targets: An obligatory percentage profit within a given time.

Stop-loss stops: Maximum allowed losses, normally both daily and cumulative.

Risk control: Certain constraints on position sizes, risk per trade, and other protection levels.

The trading strategy that you employ will have to be capable of fulfilling these needs, as each strategy carries a unique risk profile and time requirement. Let’s discuss and compare the three most common trading strategies employed by prop firm traders: day trading, swing trading, and scalping.

1. Day Trading

Day trading involves the purchase and sale of securities on the same trading day, with multiple trades during the day. The objective is to take advantage of small price fluctuations by opening and closing positions before the market closes.

Advantages of Day Trading to Prop Firms

Short Time Horizon: Since the positions are opened and closed in one day, day traders do not have overnight risk, which is attractive to prop firms with tight drawdown constraints.

Sustained Trading Opportunities: Day traders usually exploit short-term volatility, providing them with frequent opportunities to trade liquid markets such as equities or forex.

More Restrictive Risk Management: Since positions are closed each day, it is less challenging for day traders to watch over their positions and stay within risk limits, a significant requirement of prop firm trading.

Drawbacks of Day Trading for Prop Firms:

Intensive Stress and Concentration: Day trading demands intense concentration and round-the-clock surveillance of the market, which is physically demanding.

Lower Win Rate: While day traders can generate a high number of trades, the win rate trade by trade may be low. Thus, there must be consistency at a very high level in order to profit in the long run.

Risk of Overtrading: With many opportunities, day traders can have an overtrading tendency that can result in wasteful loss and drawdowns.

Ideal for Prop Firms

Day trading is also best suited for prop firm trading since it supports the firm’s objective of achieving regular daily profits without long-term risk exposure. It does, however, demand a trader to be disciplined, fast, and risk-management oriented.

2. Swing Trading

Swing trading is the practice of keeping the position for several weeks or days to weather medium-term price direction. Medium-term price direction is advantageous to traders based on technical analysis, fundamentals, or even both to determine swing points where they feel prices are trending in a particular direction.

Advantages of Swing Trading to Prop Firms

Less Time-Consuming: There is no need for swing traders to spend the entire day glancing at the screen, so they can more easily trade compared to day traders. This makes it easier for those who need a better balance between work and life.

Increased Potential for Earnings: By having their position open longer, swing traders are capable of responding to larger swings, which translate into higher gains in the end.

More Room for Error: The extended holding period time allows swing traders to re-establish their positions in the event that the market is not favorable to them, something day traders are not able to do by liquidating through the close bell. 

Disadvantages of Swing Trading to Prop Firms

Overnight Gap Risk: Swing traders expose themselves to overnight risks whereby overnight gaps in the market could cause loss. In particular, low drawdown limit prop firms are because an overnight gap can very comfortably take a trader’s account into drawdown levels.

Slow Profit Realization: Slow profit realization is the situation where swing traders slowly realize profits and, therefore, find it challenging to hit profit targets within prop firm assessment time frames available.

Requires Patience: Swing trading requires patience to wait for the right time and allow their trades to evolve over a duration of time, which might not be ideal for traders looking for instant results.

Ideal for Prop Firms

Swing trading may be very well-suited to prop firm trading if you like a relaxed pace and do not mind overnight risk. It does, nonetheless, need risk management to be conservative so that you do not have large drawdowns due to surprise market gaps.

3. Scalping

Scalping is an intraday high-frequency trading technique where a large volume of small trades are made during the day. Scalpers anticipate to profit from very small price movements, and they also enter and exit positions in minutes or even seconds.

Advantages of Scalping to Prop Firms

Large Number of Trades: Scalpers are able to make a high number of trades in a single day, and this provides them with higher opportunities to earn money from infinitesimal market fluctuations.

Rapid Profits: Due to low targets per trade, scalpers can quickly make profits, which can enable goal achievement sooner.

Less Exposure: Because the positions are held for an extremely short time, scalpers are exposed to overnight risk and sudden market action to a lesser extent, and it is easier to avoid big drawdowns. 

Drawbacks of Scalping to Prop Firms

High Transaction Costs: Scalping is typically characterized by numerous commissions or spreads, which tend to devour profits.

Strict Risk Management: Due to the high volume of trades, strict risk management is required so that losses are not accumulated rapidly. Prop firms have normally disciplined risk management rules, and scalping easily breaks them unless disciplined.

Requires High Speed and Ability: Scalping requires high speed and ability, with instant decisions. It’s not for beginners or impatient traders who can’t sit for hours.

Low Profit per Trade: Although numerous trades can be executed, every trade is of low profit value. Numerous wins are required by scalpers for earning large profits.

Ideal for prop firms

Scalping can be very profitable for prop firms when done with strict risk controls. But the requirement to maintain a high win ratio and low drawdowns is a high-pressure approach that not everyone will be able to execute. Less risk-averse prop firms will also struggle to scalp because of strict drawdown stops.

Conclusion:

There is no one-size-fits-all solution when selecting the most suitable style of trading for prop firm trading. In all honesty, it really does come down to your personality, risk tolerance, and the particular requirements of the prop firm.

Day Trading is best suited for those who are extremely focused, highly alert, and dislike overnight risk. However, it can be psychologically exhausting.

Swing Trading is perfect for traders who like to trade in a leisurely manner and also can keep positions overnight for days and even weeks but is exposing the trader to overnight risks.

Scalping is the most profitable in making money but needs genius ability, speed, and sound risk management to thrive.

Finally, the optimal style will depend on your strengths, the standards of the prop firm, and what you can live with in terms of risk. Regardless of the style you select, discipline, consistency, and prudent risk management will be the factors that lead you to success as a prop firm trader.