A few weeks ago I came across an interesting theory about how to win 100% of all prop firm challenges using hedging. It caught my couriosity. While __BFG9000__ MT4 is being tested with live trades before its release, I decided to have a closer look at this idea.

## How is it supposed to work?

The basic idea is to feed a live account with contrary trades while trading the prop firm account. So when we place a buy-position on the prop firm, we open a sell-position on the live account.

## Basic Math

Let's see how the numbers look like. Assume, we buy a $100.000 challange for $500. When we loose 10k on the prop firm account, we win $1000 on the live account. If we win $10000 on the prop account, we loose $1000 on the live account. But receiving the profit share of 80%=$8000 minus the loss of $1000, we end up with $7000.

## Real Math

In the basic analysis above we did not consider the fact that the prop firms let you do a challenge first. Thus, you need to win twice in order to get to the 80% split. We it is rather a tree of possible outcomes. A tree like this:

We have three possible outcomes: a) Loosing 500, b) loosing $500 and c) winning $8000. In the analysis later I will abbreviate these as a)=L, b)=WL and c)=WW

Also define x to be the amount of $ on the live account we hedge against loosing a prop firm account. In intro example I said we win $1000 in live if we loose on prop firm. That would be x=1000. We also might consider to hedge less or more during the challenge evaluaiton phase. That would be a factor c multiplied with x. The table below refers to all three possible outcomes, where we state the prop firm outcomes as WL, WW, or L.

Further, we say that **when we win on the prop side, we loose cx on the live side**. **If we loose on the prop side, we win x on the live side**.

Considering the loss of $500 on the prop side if we fail to reach the payout, it can be stated like the inequality below:

## Case L

Just like in the introduction, we say that if we loose our challenge fee of $500 on the prop side, we gain x=$1000 on the live side. In case the prop firm allows less drawdown than the profit target (dd= δ * profit target) we use the δ to reflect this. Thus cxδ should be larger than the loss $500 on the prop side.

## Case WW

If we win twice on the prop side, we loose the challange cx and the second hedge x on the live side. Thus the loss -x(c+1) on the live side should be smaller than the gain $8000 on the prop side.

## Case WL

If we win on the prop side and then loose it again, we have -cx+δx on the live side.

## Is there a good value for x and c?

Let's do a simple test first with **x=$1000, c=1** (same hedging ratio for challenge as for funded account) and **δ****=1** (max dd is same as the profit target).

L and WW are clear. But WTF is on WL? $500 is not less than 0! This means, there is no way to win 100% if we set x=$1000, c=1 and δ=1. 😿 Can we win with other c and δ?

## Winning - can we?

The answer is **YES**! If we do not hedge 100% during the challenge we can win every time.

I built a smart excel sheet, where you can play around with numbers as you like. Here is one possible outcome:

Customers can __download this excel sheet here__

If you like this idea, please add your comment below. If many of you like this, I will add a feature to __AI-for-Gold__ to make such hedged prop-firm trading possible.

Sounds interesting. What I didn't understand is, if one should have the same 100.000 USD on the live account in order to hedge?

I mean, it's actually a very good idea. Either way, it allows you to see profits, because you're trading both directions.

Great concept. I did come across a website where someone was doing this as a service a few months ago. Very interesting. Vqeeq

Love the idea! Thank you so much.