What is One-Step Evaluation in Trading, and How Does It Work?

Trading with all its risks and slow learning curve is a demanding undertaking. Knowing this, prop trading firms strive to make it easy for their clients, trading enthusiasts, by implementing simple and transparent evaluation processes. 

If you have found a one step evaluation prop firm, consider yourself lucky! It means that your trading performance will be evaluated based on just a single criterion. It is easy to follow and easy to focus all your talents on!

How Does One-Step Evaluation Work

To be eligible for initial funding and advancements further up the trading ladder, all registered traders must undergo an evaluation. In a one-step evaluation, a single metric is used to assess traders.

This is convenient for both: traders and proprietary trading firms themselves, as the latter are highly interested in their traders’ maximum performance and financial gains for mutual benefit.

Funding companies may adopt a particular profit target or a risk-adjusted return as the main evaluation metric. For example, FX2 Funding, a popular prop trading firm, has set a simple profit percentage as its primary evaluation metric. Their registered traders must demonstrate at least a 10% gain while following a few simple trading rules:

  • traders’ accounts must not suffer a 6% loss (in trading, the term “drawdown” is used to describe losses) from the initial trading plan;
  • in a single day, a drawdown must not exceed 4%;
  • trader’s accounts must not remain inactive for 30 days.

Such simplicity and transparency of evaluation translate into more traders willing to start earning from trading and to better traders’ performance overall. 

Maximum Drawdown Indicator Explained

In trading, the term drawdown is usually applied to a trader’s deposit (trading account) decrease as a result of unprofitable trading. Drawdown is not a tragedy. It is one of the inevitable elements of the activity of any trader who does this work systematically and professionally.

Drawdowns can be of the following types:

  • floating;
  • fixed.

Floating drawdowns occur when a position is open, but its current loss isn’t yet recorded. The drawdown can decrease, turn positive, or increase, potentially leading to a margin call and position closure.

Fixed, arising after fixation of losses on positions. This is the primary drawdown indicator typically assessed by prop trading firms.

In addition, in the process of testing trading strategies, the word “drawdown” is used with the following adjectives:

  • absolute – showing how much the trading account decreased while testing was in progress;
  • maximum – used to display the maximum drawdown value that occurred during testing;
  • relative, which is essentially the same as maximum, but expressed as a percentage.

Understanding drawdowns is crucial in trading. It’s not a setback, but rather an integral part of a trader’s journey, indicating their systematic and professional approach.

Closing Remarks

Knowing the main trading terms is essential for any trader to start their professional activities and pass the imminent evaluation process.

Even if your prop trading firm, the one that provides you with funding opportunities, requires passing a simple one-step evaluation, you still need to learn the trading theory and work hard towards constantly improving your trading performance.

Article by Born Realist