There’s no simple “yes” or “no” answer to whether prop firms are worth it because it depends on many factors. Which prop firm? Which broker do they use? What are their trading restrictions? How much must traders pay in fees?
There’s also the matter of the traders themselves—not everyone will benefit from a prop trading firm, depending on where they are in their trading journey.
Let’s explore the world of prop trading.
What is Prop Trading?
There are several categories of prop firms, and I’m going to focus on the following category:
Proprietary trading firms, or “prop firms,” are financial firms that allow traders to use the firm’s capital for trading in exchange for a percentage of the trading profits.
Prop firms are located worldwide, in the U.S., U.K., E.U. nations, and the Middle East. For example, Top Step, SurgeTrader, Funder Trading, and E8 are in the U.S., and Ascendx is in London, UK. SabioTrade is based in Ireland, while FundedNext is based in the UAE. One of the very first prop firms in existence, FTMO, founded in 2005, is based in the Czech Republic, an E.U. nation.
How Does Prop Trading Work?
The best prop firms give traders capital a live account and let them keep 80-90% of their profits, depending on the firm. However, first, the trader must pass an evaluation.
The Evaluation Process
The prop firm tests the trader’s profitability on a demo account with targets to meet before going live. What are the evaluation targets? They can include:
- Profit target.
The trader must grow the account by a specified percentage of the initial demo balance.
- Maximum drawdown.
- The prop firm stops the evaluation process if the account is down by a certain percentage from the initial deposit. 8-10% is a typical maximum allowable drawdown.
- Prop firms generally include balances from closed and open trades in maximum drawdown.
- Maximum daily loss limit.
- Suppose the account is down by a certain percentage or dollar amount within the day. In that case, the prop firm prevents the trader from continuing that day.
- The limit normally includes the value of closed and open trades.
- Minimum and maximum number of trading days.
Some prop firms want to see traders hit the profit target within a specified range of days to demonstrate consistency.
- Maximum winning day.
The best day cannot exceed a certain percentage of the profit target to ensure reaching the profit target through a series of winning days, which increases the likelihood of repeating their results.
What Happens After the Evaluation Process?
After passing the evaluation, the trader gets a live account with a pre-determined balance. Prop firms generally continue the same risk management rules from the evaluation phase when in the live phase.
Payout Policy
Prop firms have policies setting the terms for paying out profits. Typically, they allow traders to choose the frequency of payouts and pay traders within a few days of a payout request.
Which Markets Can I Trade with Prop Firms?
Many prop firms allow a range of markets, including Forex, metals, equities, and crypto. Some prop firms specialize in futures only.
What are the Prop Trading Costs?
The evaluation fee is usually the only cost. It ranges from a couple hundred to a couple of thousand dollars. Prop firms charge more if the trader wants a higher starting balance with the live account. Most prop firms allow traders to make multiple attempts without paying the fee again.
Some prop firms charge an additional monthly fee during the live account stage.
How Much Money Can I Make in Prop Firms?
Traders Receive a Percentage of the Profits (Often 80-90%)
A few prop firms will start traders at a lower percentage and then increase it as they show continued profitability.
Traders Can Make an Unlimited Amount Through Prop Trading
Successful traders can receive payouts in the tens and hundreds of thousands of dollars, sometimes more. For example, FTMO’s highest payout to a single trader is $1.2m at the time of writing.
Realistically, the profits depend on the initial balance, ranging from $10k to $200k. Most prop firms vary the entrance fee depending on the trader's starting balance.
Can I Lose Money in Prop Trading?
The only money a trader can lose is the entrance fee. Otherwise, the prop firm carries all the risk. This is one of the biggest advantages of trading a prop trading.
Pros and Cons: What are the Potential Risks and Rewards of Trading with a Prop Firm?
Pros: Rewards
- Profit earning potential. The biggest reason traders consider a prop firm is access to more capital and keeping a high percentage of the profits.
- The structure a prop firm gives. Profit targets and risk management rules help traders succeed because they provide an external structure they cannot ignore.
- Support. Prop firms offer online education and even performance coaches for one-on-one support. Many prop firms let their traders help each other. It’s easy to network with other traders online, but I only talk to successful traders in a prop firm.
Cons: Risks
- Trading restrictions. Some prop firms apply restrictions that may not suit everyone’s trading style. For example, some do not allow open positions on weekends or during big news events. Check that the rules are consistent. For example, I know one prop firm that allows weekend trades in the evaluation phase but not with the live account.
- The evaluation fee. This is usually the only financial cost.
- Broker restrictions. Traders must use the prop firm’s broker. This does not have to be a negative issue if the broker is good. Less reputable prop firms use brokers with poor execution or arrange an increased spread from which they take a payout from the broker, negatively affecting performance.
- The psychology of a larger balance. Some traders are psychologically unprepared to handle a larger balance size on a live account.
Should I Use a Prop Firm or Higher Leverage?
Some jurisdictions, e.g., the U.S., the E.U., UK, Canada, and others, have maximum leverage levels. Using a prop firm is better if I can’t get higher leverage. Some traders are comfortable accessing higher leverage if it means giving up strong regulation. Still, I do not like the idea of compromising regulation.
Bottom Line
Prop firms are an excellent source of accessing further capital to increase profit potential. Passing a prop firm’s evaluation means reaching a profit target while staying within its risk management rules. Prop firms require traders to use their brokers, which can be positive or negative depending on the broker. The support and regulations can be excellent for success if they are open enough.
