Trading Competitions vs. Funding Talented Traders

Grants
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I believe it is important to understand the differences between these types of strategies and the contribution of such strategies as a lever for growth and long-term value creation for derivatives brokers.

Let’s start by defining what each initiative entails.

A trading competition usually consists of initiatives that set prizes for the best traders over a period of time. Each competition typically defines specific criteria to rank the results of all traders, with profitability often being one of the most important factors. However, in many cases, criteria such as net trading gains are also included. These criteria are crucial as they can create environments where profitability is paramount in some cases, and where the capital employed is the most important factor in others.

Funding Talented Traders is an initiative where, based on certain criteria, capital is allocated to the operations of specific traders each period. This capital usually mirrors the trader’s operations, and the trader benefits from a significant portion of the positive results of the strategy. Typically, the trader does not incur a loss of capital if the operations result in negative outcomes.

What are the main differences between both strategies?

Marketing Spend Efficiency

In the case of the trading competition, the cost associated with the initiative is entirely awarded to the winning traders. In the case of Funding Talented Traders, we depend on the performance of the selected traders. It seems unlikely that all traders would lose all the capital employed, and we could even have scenarios where, if the selection identifies talented traders, more capital than initially allocated could be recovered. The variability will be high and will very likely also depend on the type of market.

dYdX Tokens

In a trading competition, awarding dYdX tokens might not lead to a market sale if these users typically hold onto them. In the case of the second initiative, it would be necessary to sell the tokens to provide capital for the operations. This could generate additional pressure on the token. However, if the funding mechanism proves to be more efficient in the long run, it should create less pressure as it would require a smaller budget.

Types of Traders

In a trading competition, the most rational strategy will be to take the highest possible risk with the least amount of capital. It is also common to attempt different strategies to diversify for various possible scenarios. This generally rewards traders who are particularly suited to taking high risks over a period of time, which is usually unsustainable in the long term. In the case of Funding, the focus should be on financing traders who are capable of consistently increasing the capital employed. When deploying capital as investors, what is truly relevant for brokers carrying out these initiatives is the sustainability that allows these investors to continue increasing their capital. In this case, the multi-account strategy does not make sense since the capital is deployed in only one account, and the returns come once that capital has been allocated. The incentive is to achieve good results to maintain it.

What are the main differences between both strategies?

Trader incubators are an excellent strategy and a way to attract the best talent to platforms in the long term. However, brokers typically use competition strategies because they are not interested in traders who are profitable in the long term, as these brokers often take the opposite side of trades against them. I believe dYdX should focus on strategies that seek out professional and sustainable traders for the long term and that are more capital efficient

There are many successful examples of Trader Incubators. The technical challenge would be how to copy these traders or how to assign them capital without allowing them to withdraw it. From Crypto Plaza/Dragon Stake, we could present an alternative to the trading competitions currently held at dYdX.

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We think this is a brilliant idea. A challenge system where traders can complete specific tasks to earn a funded account could be a game-changer, especially if it’s managed through a DeFi system that automates the process. Implementing this as a community-driven initiative on dYdX, using community funds, would be an exciting and innovative addition.

For example, traders could compete to earn a $100,000 funded account, with 80% of their profits going to them and 20% returning to the community treasury. This could continue until the treasury recoups its initial outlay or achieves a predetermined profit level. There are numerous ways to structure these challenges, but the concept has significant potential to engage traders and strengthen the community’s financial health.

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This is straight from ChatGPT:

Here’s an overview of how some of these funded account challenges operate:

1. FTMO

https://ftmo.com/en/

  • Structure: FTMO is one of the most well-known funded account challenge providers. Traders first go through a two-step evaluation process. The first step, called the “FTMO Challenge,” requires traders to meet specific profit targets within a set timeframe while adhering to strict risk management rules. If successful, they proceed to the “Verification” phase, which has similar requirements but with more relaxed profit targets.
  • Profit Split: Once traders pass both stages, they are given access to a funded account. Profits generated are typically split 80% to the trader and 20% to FTMO. The profit split can increase based on performance.
  • Rules: Traders must follow strict rules, including maximum daily loss limits, overall drawdown limits, and minimum trading days.

2. Topstep

https://www.topstep.com/

  • Structure: Topstep provides a similar model but focuses primarily on futures trading. Traders go through a two-step evaluation process: the “Combine” and “Funded Account Preparation.” In the Combine phase, traders need to demonstrate consistency and risk management while hitting profit targets.
  • Profit Split: After passing the Combine, traders can earn a funded account with a profit split typically set at 80% for the trader. Topstep also allows traders to scale their account size as they prove their profitability.
  • Rules: There are rules regarding daily loss limits, overall drawdown, and consistency in trading.

3. The5ers

https://the5ers.com/

  • Structure: The5ers offers a funded account program that also begins with a challenge. Traders must achieve a set profit target with limited drawdown. Once they pass, they receive a funded account that allows them to trade with real capital.
  • Profit Split: The profit split typically starts at 50-50, but traders can advance to higher profit splits and larger account sizes as they demonstrate profitability.
  • Rules: The5ers emphasize risk management, with strict drawdown limits and a focus on consistent trading.

General Operating Principles:

  • Evaluation Phase: Most funded account challenges begin with an evaluation phase, where traders must prove their ability to trade profitably while adhering to strict risk management criteria. This phase is usually time-limited and requires hitting specific profit targets.
  • Funded Account: Upon successful completion, traders are given access to a funded account with real capital. The size of this account can vary depending on the platform and the trader’s performance during the evaluation.
  • Profit Split: Profits generated from trading are typically split between the trader and the funding platform. The exact split varies, but it often starts around 70-80% in favor of the trader and can increase with good performance.
  • Risk Management: All programs enforce strict risk management rules, including limits on daily losses, overall drawdowns, and sometimes even the number of trading days required.
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Excellent compilation of the best account funding systems. To add an initiative with great success in Spain that is managing millions of euros, I’d like to share Darwinex with you.

It shares many of the rules applied in the programs that @CipherLabs has shared with us. It’s important to conduct an initial screening of these traders, which in the case of Darwinex is done by providing funding with less capital and using a Scoring system to evaluate their trading activity. This method specifically aims to balance profitability, which is one of the main metrics, with other operational data to select what is considered the most sustainable trading strategies. Traders then move to a second level with more allocation once they meet certain requirements. In this case, 15% of the profits generated by the trader with the capital funded by both the platform and independent investors is shared. This approach has allowed the platform to significantly increase the percentage of profitable traders, which is typically very low on derivatives platforms.

Currently, 20 million in capital is allocated each month, which is available to the investor for 3 or 6 months. If the investor demonstrates profitable behavior, this capital is renewed.

Currently, the top most profitable traders remain relatively stable, as significant investment talent has emerged from this process. These top traders are copied by many other users, making this a truly important part of the platform’s activity.

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Kudos to the contributors of this thread. Nothing to add from my side at the moment, but thinking of ways to generate more volume combined with effective spends of incentives.

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