What are trading challenges and why are they getting so popular?

Forex and CFD (Contracts for Difference) brokers often offer trading challenges and trading competitions to their clients to attract more traders and motivate existing ones to trade more frequently in a given period of time. Increased trading activity means that brokers will be able to collect more fees from spreads and trading commissions. A broker’s main goal is not to make a trader more profitable, the broker’s goal is to turn passive traders into active ones, which makes participating in trading challenges difficult.

There are live and demo trading challenges, in addition, there are trading competitions that attract different types of traders. Let’s delve into more details and find out why trading challenges are becoming increasingly popular globally.

Benefits of Participating

There are many benefits of participating in trading challenges, as well as risks, which we'll discuss later in this article. The main benefits include:

●     Skill Development: trading challenges are an opportunity for traders to develop their skills and test different trading strategies. Especially when there’s no real money on the line and the trading challenge is for demo accounts.

●     Networking Opportunities: most trading competitions and challenges are held by financial institutions, prop firms, or educational platforms. Participants get a unique chance to network with industry professionals, challenge runners, and fellow traders.

●     Recruitment opportunities: Some of the top forex prop firms and financial brokers hold trading challenges with an aim to find talented traders. In such cases, they are not motivated to encourage traders to trade more, instead, they motivate them to trade the right way. Typically when prop firms are trying to recruit new traders, they observe how potential candidates manage risks. It’s more important for trading firms to find traders with good risk management skills that can grow capital step-by-step, than traders that can double or lose an entire capital overnight.

●     Prize Incentives: most trading challenges offer cash prizes or luxury items for challenge winners. These prices can be incredible motivators for aspiring traders.

Types of Trading Challenges

There are various types of trading challenges. Before participating in one, make sure you understand the motivation behind each challenge, what are your goals and expectations.

●     Demo trading challenges: demo challenges are risk-free opportunities for traders to participate and get experience. Often, it is difficult to use demo accounts to learn anything as when there are no real rewards involved, traders lose motivation. Which is not the case in demo challenges. Often there are cash and non-cash incentives for the top participants.

●     Live trading challenges: live trading involves using real money, and in such cases, risks are increased. If the conditions and rules ask traders to increase their trading turnover, traders will have no other option but to take higher risks.

●     Proprietary (Prop) Trading Challenge: prop firms often hold trading challenges to attract talented individuals. Such events are perfect for networking and offer great learning opportunities as prop firms prioritize proper trading over high turnovers.

Tips for Participating

When participating in a trading challenge or a competition, it’s crucial to first read the terms and conditions thoroughly before committing to winning. Often conditions are too harsh and traders have very little chance of getting rewards and bonuses.

Secondly, if you do participate in a competition, make sure it has zero impact on your trading style. It’s a terrible idea to develop trading skills in a competition that is focused on short-term gains and ignores risk management rules and long-term stability. It’s okay to take excessive risks to win a challenge, but make sure it doesn’t turn into a habit.

Risks of participating in trading challenges

While there are many benefits to participating in trading challenges, there can be various risks. Depending on the motivation of the challenge runner, traders may damage their approach to trading.

●     Financial risks: some trading challenges require traders to use live accounts, which can lead to financial losses. Financial trading carries inherent risks, and traders should only invest in the live trading only the amount they can afford to lose.

●     Lack of regulations: unlike regulated financial institutions, trading challenges may not be regulated by regulatory bodies.

●     Overtrading: trading challenges, especially if they are held by financial brokers, can lead retail traders to develop an unhealthy approach to trading. As already mentioned, brokers are motivated to have a large pool of active traders, to make more money from trading fees. Such challenges often incentivize traders to take extra risks, trade larger positions, or increase the frequency of trading. While some traders are profitable trading frequently (intraday traders), others have different personalities and can only make money when they have enough time to analyze markets thoroughly and place much fewer trades (swing traders). Even if the trading challenge is held on demo platforms, traders may still damage themselves by a new habit that urges them to overtrade.

●     Unrealistic Expectations: some challenge participants, especially beginners who haven’t had experience with trading financial markets, may develop unrealistic expectations.

Final Thoughts

To sum it all up, trading challenges are a popular way for brokers to attract new clients. In addition, many Prop trading firms are using trading challenges to discover talented individuals and offer them jobs. While there are many benefits to participating in such events, there are also many drawbacks. The main advantages include skill development, networking opportunities, recruitment opportunities, and prize incentives. The drawbacks include financial risks when participating in live challenges, lack of regulations, and developing unhealthy habits, such as overtrading, and setting unrealistic expectations.