How Prop Firm Challenges Work: 1-Step vs 2-Step Evaluation Explained

Before you can trade with a prop firm's capital, you must prove your trading ability through an evaluation (also called a "challenge"). This guide explains exactly how these evaluations work.

What is a Prop Firm Challenge?

A challenge is a test period where you trade on a demo account with simulated capital. You must reach a profit target while staying within risk parameters. Pass the challenge, and you receive a funded account with real capital.

Types of Evaluations

1-Step Challenge

A single phase evaluation where you hit one profit target and get funded immediately.

• Typical Target: 8-10% profit
• Time Limit: Unlimited (most modern firms)
• Pros: Faster to pass, simpler process
• Cons: Usually higher target or tighter drawdown

Examples: FundedNext Stellar, E8 Markets E8 Track

2-Step Challenge

Two phases with different targets - Phase 1 (Challenge) and Phase 2 (Verification).

Phase 1 (Challenge):

• Profit Target: 8-10%
• Time Limit: Unlimited (or 30 days on older firms)
• Purpose: Prove profitability

Phase 2 (Verification):

• Profit Target: 5% (typically half of Phase 1)
• Time Limit: Unlimited
• Purpose: Prove consistency

Examples: FTMO, Alpha Capital Group

3-Step Challenge

Less common, adds an extra phase for additional verification.

• Usually lowest overall drawdown risk
• Takes longest to complete

Standard Challenge Rules

Profit Target

The percentage gain you must achieve to pass. Common targets:

• Phase 1: 8-10%
• Phase 2: 4-5%
• 1-Step: 8-10%

Important: Profit is calculated on the initial balance, not rolling equity.

Daily Drawdown Limit

Maximum loss allowed in a single trading day. Typically 4-5%.

How it works: If your account starts the day at $100,000 and you have a 5$95,000 equity at any point during the day = failure.

This resets at server time (often UTC, sometimes EST).

Maximum Drawdown

Total loss allowed across the entire challenge. Typically 8-10%.

Can be calculated in different ways (see our Drawdown Guide).

Minimum Trading Days

Some firms require trading on a minimum number of days (usually 4-5) to prove consistency.

Why it exists: Prevents "lucky one-day" passes where someone gambles on a single trade.

What Happens After You Pass?

• Review Period: Firm reviews your trades (1-3 days)
• Contract Signing: You sign a funded trader agreement
• Funded Account: Receive access to real capital
• First Payout: Usually 14-30 days after funded

Pro Tips for Passing Challenges

• Risk only 0.5-1% per trade: Gives you 5-10 bullets per day
• Build a buffer first: Get +2-3% cushion before taking bigger trades
• Don't rush: Unlimited time = no pressure
• Avoid news events: Many firms restrict trading around high-impact news
• Stop after 2 consecutive losses: Prevents revenge trading spirals

Common Reasons Traders Fail

• Hitting daily drawdown (28%): One bad session ends everything
• Overtrading (42%): Too many positions, too much exposure
• Revenge trading (15%): Emotional decisions after losses
• Rule violations (10%): News trading, weekend holding, etc.
• Gambling (5%): Oversized positions hoping to pass quickly

Which Challenge Type is Best for You?

Choose 1-Step if:

• You want faster access to funding
• You have a high win rate strategy
• You can handle slightly tighter rules

Choose 2-Step if:

• You prefer lower targets spread across time
• You want to build a larger buffer before Phase 2
• You're new to prop firm challenges