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What is Toxic Trading Flow?
Updated over a week ago
Toxic Trading is defined as reckless risk-taking, impulsive behavior, and a disregard for fundamental principles. The threat of toxic trading jeopardizes not only individual trader accounts but also the stability of proprietary trading firms. We will shed light on toxic trading, defining its various manifestations and underscoring the imperative for vigilance and responsibility in the pursuit of profitable trading strategies.
Toxic trading encompasses a variety of behaviors and practices, with some common characteristics including the following:
Excessive Risk-Taking (Over-Leveraging)
Participating in trades with disproportionately high levels of risk in relation to the trader's capital or risk tolerance. This often involves utilizing excessive leverage causing overexposure or full margin, which can magnify both gains and losses. Additionally, for the 2-Step Master accounts only, executing excessive amounts of lots relative to the account size exceeding the Maximum Lot Exposure Limit. See "What is the Maximum Lot Exposure Limit? (2-Step Master account only)" to read more.
Maximum Lot Exposure Limit per account size (2-Step Master accounts only)
$25,000 is max 10 lots
$50,000 is max 20 lots
$100,000 is max 40 lots
There is no limit applied on the 5,000 and 10,000 2-Step Master accounts.
If the trades are closed, you are allowed to open new trades on the same day. The Maximum Lot Exposure Limit is only for the open trades, it is NOT a daily limit.
If you exceed this limit, all the profits from trades that were opened and were ABOVE the limit will be deducted from the account. In the event any deductions result in the breach of the daily loss limit or maximum loss limit, the trader is responsible for the violation.
The first time we detect that the lot exposure limit was exceeded will result in a warning. The second time will result in a closure of the account, profit deduction and 30% performance commission, plus all the profits from trades that were opened and were ABOVE the limit will be deducted from the account.
Gambling Behavior
Trading is driven by emotions rather than rational analysis, similar to gambling. Traders may pursue losses, make impulsive trades, or display addictive tendencies, leading to negative trading outcomes. Your biggest loss should not exceed 3% of the account size on the Master accounts only . Splitting up a trade into multiple positions will be counted as one single trade.
Overtrading
Continuously entering and exiting trades without a clear strategy or rationale, resulting in diminished profitability and emotional exhaustion.
High-Frequency Trading (HFT) & Tick Scalping
Engaging in excessive and rapid trading activities indicative of higher volatility, which may result in significant losses. Profit from trades that are closed within 1 minute after opening will not be counted on our Master accounts only. In the event any deductions result in the breach of the daily loss limit or maximum loss limit, the trader is responsible for the violation. See "What happens with profits from trades closed within 1 minute? (Master only)" to read more.
Arbitrage
All forms of arbitrage are considered toxic due to the lack of a clear underlying idea, strategy, or rationale. Below are two common arbitrage strategies:
Hedge Arbitrage: Simultaneously entering opposing positions with different firms.
Latency Arbitrage: Exploiting disparities in trade execution times across various trading platforms or venues. Traders using this strategy seek to profit from minor price differences resulting from delays in order processing or data feed.
Poor Money Management
Traders who frequently encounter margin calls due to inadequate funds or risky positions may indicate a lack of risk management, posing a threat to their accounts and potentially the firm’s stability.
Behavioral Patterns
Inconsistent behaviors, such as trading during non-liquid market hours to exploit liquidity shortages, consistently disregarding risk management principles, or making emotional decisions.
Reverse Trading
Signs and behavior, which includes risking the full daily loss on one trade, which often indicates reverse trading between different firms.
Traders suspected of engaging in such behaviors may be subjected to various restrictions including but not limited to reducing leverage, limiting the number of trades per day, lot size limit per day, lower daily/max loss limiting the risk per trade, imposing a maximum 1% risk limit rule or even being banned from the firm. Our goal as an Evaluation firm is to assist you becoming a better trader and risk manager, while also benefiting from the trading flow you provide. This evaluation aims to gather the best trading data possible, enabling us to monetize our data more efficiently, enhancing our stability, and strengthening the industry as a whole.
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