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.
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.
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
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.
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.
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
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.
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.