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.
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 on any of our accounts.
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.
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.
