With retail Forex prop trading gaining popularity, many potential traders ask themselves: what happens if you lose money on a funded account? Before answering this crucial question, I will elaborate on the difference between retail prop trading and professional prop trading, as many retail traders think they are identical. Before traders consider the fee-based challenges at retail prop trading firms, they must master risk management, as strict maximum drawdown limits pose a significant challenge to any strategy.
Get Started 74% of retail CFD accounts lose moneyRead Review
How Prop Trading Works
I will explain how prop trading works at retail prop trading firms, which differs from prop traders at licensed, professional financial firms, hedge funds, and high-frequency trading firms.
Retail prop traders must understand three defining aspects before proceeding:
They will always trade in demo accounts and never with real money
Retail prop firms use copy trading software to copy trades from demo to live accounts they manage at their discretion
Some retail prop traders will never have their trades copied to real money accounts
Here is how retail prop trading works:
Managing partners provide initial trading capital
The best retail prop firms seek profitable retail traders that lack capital
A paid-for challenge model serves as an initial test and a massive monthly revenue stream
Few retail traders pass the challenge and pay a monthly fee for access to capital in a demo account
Prop firms use copy trading software and copy trades into live portfolios at their discretion
A profit-share model provides the prop firm with ongoing capital and rewards traders with income
Strict risk management protocols leave little room for error, and retail prop firms kick out traders as soon as they breach a tight drawdown window
Most retail prop firms claim that they earn when their prop traders earn via a profit-share model, but many retail prop firms earn most of their revenues from paid-for challenge fees and monthly subscriptions.
Here is an example:
Prop trading firm ABC has 10,000 funded prop traders who pay $150 per month for access to capital, generating $1,500,000 in monthly non-trading revenue
For each funded account, assume 100 traders fail the challenge, which costs $100, or 10,000 (funded traders) x 100 (failed traders per funded account) = 1,000,000 x $100 for a total of $100,000,000 in one-off non-trading revenue
Noteworthy:
The more capital traders seek, the higher the one-off challenge fee and monthly subscription
Restrictive trading conditions, plus tight daily loss and overall loss limits before the loss of access to capital results in traders either blowing their account or generating relatively small profits, of which the prop trading firm takes between 10% and 50%
The Challenge and the Live Phase in Prop Trading
The challenge phase:
The challenge phase is an initial test to limit risk, as retail prop firms actively seek profitable traders to copy. The conditions are unrealistic and place excessive pressure to achieve profits, often ignoring sound risk management while implementing strict daily and overall drawdown rules.
Traders pay real money for access to demo accounts, and the more capital they seek, the higher the one-off challenge fee and the monthly subscription fee for traders who pass the challenge. Reading the rules and requirements confirms it resembles a game more than trading. For example, if a trader makes the required profit in one trade, they pass the challenge. Some retail prop firms have a two-tier challenge phase, but the basics remain identical.
The live phase:
The live phase keeps traders in demo accounts, but prop firms may copy trades into live accounts at their discretion. A profit-share model exists, but some traders must trade a certain amount before qualifying for withdrawals, funded by one-off challenge fees.
Can I Lose Money in a Funded Account?
Retail prop traders will trade in demo accounts, making all profits and losses theoretical, meaning they are not liable for any losses. So, what happens if you lose money on a funded account? Traders who violate the maximum drawdown rule lose access to the account and must pay and pass the challenge again.
How Prop Firms Limit Risk
Tendency of prop firms to keep traders in demo accounts
Strict drawdown rules
Restriction on overnight trading
Limitations during news events
Stop-loss order requirements
Copying traders with proven track records
What Is the Maximum Drawdown Rule?
The maximum drawdown rule is a hard-loss limit, for example, 10% of the funded account balance. Once traders violate the maximum drawdown rule, they lose access to their funded account.
What to Do If I Start Losing Money in a Funded Account
Step away from trading
Decrease trading volumes
Evaluate parameters of the strategy
Add confirmation rules
Change trading times and timeframes
Tips for the Best Prop Firm Trading Experience
Understand the terms and conditions
Choose a prop firm that supports algorithmic trading
Verify their withdrawal reliability
Avoid prop firms with restrictive trading conditions
Trade with transparent prop firms who disclose their brokers and partners
Bottom Line
What happens if you lose money on a funded account? Since retail prop trading firms keep traders in demo accounts, the only thing that happens is that traders lose access to funded demo accounts if they violate the maximum drawdown level.
Bottom Line. What happens if you lose money on a funded account? Since retail prop trading
prop trading
Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using depositors' money) to make a profit for itself.
https://en.wikipedia.org › wiki › Proprietary_trading
firms keep traders in demo accounts, the only thing that happens is that traders lose access to funded demo accounts if they violate the maximum drawdown level.
Proprietary trading firms often provide evaluation accounts where you prove your trading skills. Usually, you pay a one-time fee to enter this “challenge.” If you lose money during this evaluation, you won't owe anything beyond the initial fee.
After you pass all the Trading Objectives in your FTMO Challenge, you will see a notification in your Account MetriX informing you about your success, and you won't need to trade the account anymore as your Trading Objectives are marked as passed.
Funded accounts become eligible to request payouts based on the time since the first trade is placed on the Funded account and subsequent payouts become eligible based on the amount of days after the date of your first trade following any previous withdrawal.
Risk of Losing the Account: Funded trading programs set stringent rules and restrictions for traders. This means limited trading strategies and specific risk management guidelines. While these rules are in place to manage risk, they can also restrict flexibility.
So, what happens if you lose money on a funded account? Traders who violate the maximum drawdown rule lose access to the account and must pay and pass the challenge again.
There are no exceptions for rule violations for Funded Level accounts. This means that once your Maximum Loss Limit has been hit in an Express Funded or Live Funded Account, the account will be automatically closed after the Trade Report is updated.
Staying focused and disciplined is essential when taking the Funded Account Challenge. Avoid distractions and stay focused on your trading strategies. Don't be afraid to take a break if you need it, but always come back with a clear head and renewed energy.
To pass a challenge account with ease, you need to have a strong trading foundation. This includes developing a deep understanding of technical and fundamental analysis, practicing chart analysis and pattern recognition, and learning to use multiple time frames and indicators to confirm trading signals.
The timeline for passing and qualifying as a funded trader is usually 4-5 months. However, it's necessary to bear in mind that becoming an effective trader beforehand is not a quick process.
After a client becomes a Simulated Funded Trader, he/she will be provided with a demo account with simulated funds. The Funded Trader challenge and funded accounts are not live trading accounts, they are fully simulated accounts utilizing real market quotes from liquidity providers.
Once you pass the evaluation, you receive a funded account where you are eligible for 75 to 90% of the profits that you make. But how many people actually pass this process? ' Therefore, the pass rate for the whole evaluation, meaning the percentage of people who buy an evaluation that get funded is 8%.
Statistics on Funded Trading Payouts and the 1% Myth
The claim that only 1% of traders succeed is a pervasive legend, but the reality is a bit more forgiving. While trading is no cakewalk, the actual success rate might be closer to 5%.
With a smaller funded account of around 5k, you're risking less capital overall while getting your toes wet in the market, reducing the potential for large financial losses, as the trading firm covers the losses.
You lose the fee regardless of what happens in the challenge. You do not need to worry about being on the hook for other losses in your evaluation account. Since they are virtual funds, they are not real losses, either to the prop firm or to you.
Profit Split: The average prop firm will offer a 80-20 profit split once you become a funded trader. TFT, on the other hand, gives up to a 90% split, — even as high as 95% in some promotions — the highest in the industry.
The article from Lux Trading Firm provides slightly different results. According to it, 4% of traders, on average, pass prop firm challenges. But only 1% of traders kept their funded accounts for a reasonable amount of time.
It is typical to move from an 80/20 split to a 90/10 split or from a 50/50 split to a 25/75 split. The percentage of profits that a prop firm takes can vary, but it is usually somewhere between 10-50%.
Introduction: My name is Jeremiah Abshire, I am a outstanding, kind, clever, hilarious, curious, hilarious, outstanding person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
