Key Takeaways
- Proprietary Trading Firms, commonly known as prop firms, are organizations that equip traders with substantial capital and resources needed to operate in markets, particularly the forex market. They work by meticulously selecting traders with a proven success record, and upon passing an evaluation phase, provide them with an account with equivalent capital to manage, accompanied by a profit-sharing arrangement.
- Prop firms offer a multitude of benefits including access to significant capital, specialized training programs, state-of-the-art trading tools, improved risk management, potential for higher returns, and lower startup costs. These resources and opportunities can greatly enhance a trader’s performance and profit-making potential.
- While the benefits are appealing, joining a prop firm also presents challenges. These include the requirement to share a portion of profits, and a competitive environment that might not suit everyone. Therefore, it’s essential for traders to thoroughly understand the policies, culture, profit-sharing agreements, and terms and conditions before committing to a prop firm.
Diving into the world of trading can seem intimidating, especially when confronted with the significant amount of capital needed to make meaningful trades. Proprietary Trading Firms, or prop firms, aim to help you with that. But what is a prop firm? In essence, it is a company that supplies aspiring traders with the capital and resources necessary to be profitable in markets like forex. These firms scout for talented traders and back them with their own capital, providing a mutually beneficial relationship.
Ready to learn all about prop firms? Let’s get started.
What Is a Prop Firm?
A Prop Firm, also known as a Proprietary Trading Firm, is a company that provides traders with the capital and resources needed to trade. Specifically, often the resources to trade the foreign exchange (forex) market. Prop firms require traders to demonstrate their ability to consistently generate profits; on the other hand, traders use prop firms to acquire the necessary capital to open high-value positions. In return for managing the company’s capital, prop firms retain a share of any profits made by the recruited trader, this is called profit split or profit share.
The increasing popularity of prop firms bears testament to the convenience of this mutually beneficial arrangement.
So, what is a Prop Firm? It’s a company that headhunts talented traders and backs them up with their money; in return, traders, who would otherwise be limited to small trades of personal funds, can access corporate-level capital and resources.
How Does a Prop Firm Work?
Forex prop firms work by recruiting traders with a proven track record of successful trading. Most firms will use a one-off evaluation (sometimes referred to as a “challenge”, more about this in the next paragraph) or a series of internal tests to judge whether the trader can be trusted with the company’s capital. It’s important to note that even traders who fail the challenge the first time around benefit from the experience of participating in a challenge and are more likely to become funded traders in the future.
After the trader passes the FAC (Funded Account Challenge), they receive an account to manage that is equivalent to the account they purchased; these usually range between $10k and $200k but can go up to $1 million or more. Funded users start trading on these accounts and can request payouts when in profit, usually with a profit split that ranges from 50/50 to 80/20 in favor of the trader. It is important to point out that funded prop accounts are subject to rules such as maximum and daily drawdown limits, and the trader can lose their account if they break said rules.
Furthermore, some firms reward consistent profitability with a scaling plan that allows traders to considerably increase the size of their account. For instance, FunderPro’s scaling plan allows for accounts up to $5 million.
How Does a Funded Account Challenge Work?
Conceptually, funded account challenges are very simple to understand. Nonetheless, there are some things that you should be careful about when considering undertaking one, the first being that every prop firm has different rules. Before talking about this, let’s see what the rule of thumb is if you decided to get funded:
- You would purchase a FAC (Funded Account Challenge). The initial investment varies based on the account size: a $25k challenge will cost less than a $200k challenge but will also yield less profit. You can check out FunderPro’s pricing here.
- After the purchase, you will receive credentials for your new account and can start trading. The general rule is that during the challenge you will trade on a demo account. To pass the challenge you need to satisfy certain requirements that vary for every prop firm but are generally tied to profitability. Most firms have a two-phase verification process (often referred to as “Evaluation” and “Verification” steps), although some also offer one-, three-, and “no-steps” verifications. FunderPro gives you unlimited time to reach those profit targets and pass the two-step funded account challenge, but many firms impose a specific amount of time, usually 30 days.
- After passing the challenge, you will be given a funded account of the same size as the challenge you bought. Any profit you will generate from this account will be paid out according to a set profit split percentage and the rules set by each firm. FunderPro payouts are issued weekly and have an 8-hour average processing time, but most other firms pay out monthly and processing time can take anywhere from one to several days.
Now, a note of caution: every prop firm has its own rules. Make sure you read the terms and conditions carefully and ask any questions before you undertake a funded account challenge. For example, FunderPro funded traders manage a live account with real funds, but most other firms keep their traders on demo account even after they win their challenge. If you would like to work with an STP standard, this distinction might be important to you.
What Tools Are Made Available by a Prop Firm?
Prop firms need their traders to be happy and profitable, hence they often provide additional resources and support to help them become more successful. These could be anything from trading courses and professional mentorship programs to powerful trading software and other tools. The firm may also provide traders with real-time market data and analytical tools. Traders will also be joining a team of industry experts with whom to seek advice, share trading tips, and collaborate within a professional sphere.
For example, FunderPro offers TradeLocker, one of the most advanced trading platforms on the market, 24/7 trader support, and a lively Discord community where traders can interact.
Overall, the goal of a prop firm is to single out talented traders who have the potential to grow their profits, and, in turn, grow the firm’s overall profits. The relationship is win-win: traders with limited funds can access hitherto undreamed-of leverage, while the firm can increase its profits through a pool of talent.
Benefits of Joining a Prop Firm
Traders benefit from joining a prop firm in numerous ways, including:
Access to Larger Capital
Too many excellent traders are held back by one thing: lack of funds. No amount of technical and market analysis or back-tested strategies will be any good without the capital with which to trade. Traders who join prop firms not only access greater capital (sometimes up to hundreds of thousands of dollars, or even millions) but they are not risking personal funds. Moreover, they do not bear responsibility for the company’s funds. One of the biggest benefits of prop firms is that while they share the profits, they take full responsibility for any losses.
Trading Courses and Education
Prop firms may provide traders with invaluable training programs, risk management strategies, and trading platforms. Good traders learn from mistakes and even those who fail the evaluations the first time are allowed to try again with their newly acquired knowledge. Most prop firms provide traders with their metrics and data so that they can analyze their progress and avoid pitfalls in the future.
Improve Your Risk Management
Prop trading is an exercise in risk management. Prop firms have strict rules that need to be observed both to receive funding and to keep it. Daily and overall drawdown are classic examples, but also the so called “Consistency Rule”, initially conceived as a risk management tool for the company, can become very beneficial to traders themselves in the long run.
Amplify Your Gains
Due to the higher capital managed, most traders earn more from profit sharing with the prop firm than they would from trading their own funds. By gaining financially from the arrangement, traders are incentivized to maximize their profits and generate consistent returns as this could potentially lead to trading becoming the only source of income they need.
Low Startup Cost
Joining a Forex Prop Firm is a popular way to dip a toe into trading waters. Trading forex for the first time, with your own money, can be both daunting and expensive. Beginner traders who are confident of their skills but inhibited by limited funds can start trading forex without shouldering all the financial risk.
Challenges of Joining a Prop Firm
Even though prop firms are an enticing offering in the financial market landscape, they may not be for everyone! Many traders will see enormous potential in the opportunity to access near-instant capital, trade without personal risk, and unlock free training courses within a prop firm, while others may feel overwhelmed and not ready to manage such large capital. Furthermore, many proprietary firms tend to foster a competitive environment that may not be suited to everyone.
Another issue may be that the challenges are not free, while the sign-up costs can be as little as $20 there is nonetheless a risk of losing the challenge and the fee with it. That said, ambitious traders willing to learn from the experience can often reattempt the challenge for free or for a discount, and once they get funded, many firms will refund the entire entry fee.
While Forex Prop Firms offer several benefits to traders, there are also other potential drawbacks that traders should consider before joining. Here are some cons of prop firms:
Limited Autonomy
Traders who join a Forex Prop Firm typically must adhere to the firm’s rules and guidelines, which can limit their autonomy and flexibility. The firm may require traders to follow specific trading strategies, and risk management practices, use certain technology platforms, and trade above strict daily and overall drawdown limits. While this can be a constructive learning environment encouraging good risk management practices, some traders may find this aspect of prop trading limiting.
Profit-Sharing Arrangements
While profit-sharing can be a benefit of joining a prop firm, it can also be a disadvantage. As we saw, the exact profit-sharing arrangement may vary from firm to firm, but traders typically must share a portion of their profits with the firm. If a trader has access to large personal capital, the profit split can reduce the amount of money that traders can take home, even if they generate consistent profits.
Competitive Environment
Forex Prop Firms typically have a competitive environment, where traders are competing for access to the firm’s capital and resources. Often trading challenges are organized in exchange for prizes and public leaderboards are kept. This can create a high-pressure environment that may not be suitable for all traders. Traders who struggle with competition or who prefer a more collaborative environment may find this aspect of prop trading challenging.
FunderPro specifically tries to foster an inclusive and low-pressure environment, where dialogue between the firm and traders is encouraged more than competition.
Why Should You Join a Prop Firm?
Notwithstanding the above, there is an undeniable increase in the popularity and reach of forex prop firms. Of course, the main appeal to forex traders is the access to capital: few traders would pass up the opportunity to make larger trades and therefore generate greater profits. Beginner traders learning the ropes might join a prop firm to practice in a new market without risking their capital. Account sizes aside, there are numerous other reasons behind the rise of prop firms such as:
Access to State-of-the-Art Technology
Forex prop firms often incorporate trading resources and technology that may not be available to individuals. This can include access to advanced charting software, real-time data feeds, and analysis tools. Additionally, the in-house training and mentorship programs often included within prop firms help forex traders keep up with the fast-changing industry.
Reduced Trading Costs
Forex Prop Firms may offer reduced trading costs for traders since they can access economies of scale that individual traders can’t. The firms can negotiate lower commissions and spreads with brokers and other service providers, which can result in lower trading costs.
Improve Your Trading Through Experience
Regardless of whether a trader passes a prop firm challenge the first time around, they will leave with experience on their side. Rookie traders new to the forex market might prefer to pay a one-time entry fee and practice trading with company capital than risk their funds on the line before they are ready. Furthermore, many prop firms, FunderPro included, offer a free demo, that let users experience prop trading at absolutely no cost.
Conclusion
Overall, Forex Prop Firms can be an excellent option if you are looking to access larger capital and resources, but it is important to carefully consider the potential drawbacks before you join. You should research the firm’s policies, profit-sharing arrangements, terms and conditions, and culture, to ensure that they align with your goals and trading style. Since prop firms recruit traders based on their track record of profitability, the competition to join a firm can be fierce. At the end of the day, you are in control of your trading, and you should make the decision that makes you most comfortable at any moment in your career. If you have any further questions about prop firms and how they work, you can reach out to FunderPro’s friendly customer support by hitting the chat icon in the bottom-right corner of your screen.
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