A proprietary trading firm, often referred to as a “prop trading firm” or “prop firm,” is a financial institution that trades financial instruments using its own capital, leveraging experienced traders.
Typically, prop trading firms provide funded traders with great trading conditions over multiple account types to serve different trading styles, along with educational resources...
They also pay out successful traders' trade profit splits while offering great risk management - clients don't risk their own capital while trading the financial markets!
Proprietary trading firms differ from hedge funds in that hedge funds are only available to high-net-worth individuals.
Anyone with trading skills can get paid to trade with proprietary trading.
Typically, there is a low monthly fee, but some proprietary trading firms even offer demo accounts to trade on, if you're just getting started!
This is not the world of investment banks for the few, these financial institutions require talented traders to trade!
Trading with a proprietary trading firm offers several compelling benefits for traders. One of the primary advantages is the ability to trade with the firm’s capital and trading platforms while having minimal barriers to entry... providing access to higher leverage and the potential for greater returns on a profitable trade. This can be particularly beneficial for traders who have the skills but lack substantial personal capital to trade on their own.
Some proprietary trading firms test your technical analysis trade ideas in the financial markets over unlimited trading days. However, they usually require traders to trade over a minimum trading day requirement. Usually, this means you must trade at least 2-5 trading days.
Prop firms are financial institutions that provide access to advanced trading tools, fast payouts, a comprehensive platform, and a seamless trading experience for your trading strategies. The trader needs to follow consistency rules when making a trade. Most props require challenge fees to be paid to trade. Account sizes range and some proprietary trading firms have time limits to test your trading skills.
Prop trading resources often include state-of-the-art trading platforms, real-time data feeds, great trading conditions, and sophisticated analytical tools. Additionally, many prop firms foster a supportive trade community where traders can share insights on how to trade and increase their chances of making profits.
Another significant benefit is the flexibility and autonomy that prop firms offer with their trades. Traders can focus on developing and executing their trading strategies without the constraints typically associated with traditional financial institutions. This environment allows traders to pursue their trading goals more effectively and efficiently!
Choosing the right prop trading firm to trade with is a critical decision that can significantly impact an experienced trader’s success. Here are some key factors to consider when selecting a prop firm to trade:
The reputation of a prop trading firm is paramount. Look for prop trading firms with a proven track record of success and positive feedback from traders. A reputable firm will have a transparent and fair business model, with clear rules and guidelines for traders to trade. It’s also essential to ensure that the firm complies with financial regulations, which can provide an added layer of security and trust while you trade.
Unfortunately, the reality is that customer support is lacking in most prop trading firms! They typically use an email ticket support system that can take 1-2 days to receive a response... and you're lucky if they answer your original question! The funded trader would be better suited to looking for a comprehensive platform and fast payouts, along with community engagement, e.g. some firms do giveaways of free evaluations in their Discord servers. Ideally, your focus will be on making your next trade and not spending hours waiting for customer support emails. ;)
Understanding the fee structure and profit-sharing model of a prop firm is crucial. Look for prop trading firms that offer competitive fees and favorable profit-sharing ratios while you trade for them... that's where you should trade! Of course, let's not forget payout speed... fast payouts make a huge difference! Some firms may provide higher profit-sharing ratios but force you to wait 30 days for a payout which is no good!... It’s important to find a balance that aligns with how you trade and your financial goals.
Examine the prop trading firm’s withdrawal policies, including payout limits and processing times. Ensure they offer convenient withdrawal methods and understand any restrictions on the frequency of withdrawals/max profits. A firm with a flexible and efficient withdrawal policy can provide greater control over your funds, allowing you to relax and access your trade profits when needed. :)
By carefully considering these factors, traders can choose a prop trading firm that best suits their trading needs, trading strategies and enhances their trading potential.
Types of Prop Firm
Futures Traders have the easiest choice to trade, here. Futures firms offer expedited payouts and the challenges are much cheaper vs forex prop firms. Trade conditions are much better with these firms, as well. The best example of this type of funded trader program is Apex Trader Funding. The drawback is that these funded trader programs make risk management a bit tough by usually only offering only a trailing drawdown!
This means when you make a trade, the max allowed drawdown follows your unrealized profits!
So ultimately, these accounts are ideal for day trades.
Funded traders need to consider this factor when picking a trading firm to trade with because even with educational resources and a comprehensive platform to trade on, low fees can rack up quickly and become high fees overall if you're not careful with trailing drawdown and resetting accounts!
Picking the right prop firm becomes a trade in and of itself!
A funded trader program is designed to evaluate traders through various trade challenges, allowing them to trade on a funded account once they prove their trading skills. These trade programs offer flexibility and cater to different trading styles, with potential growth in account sizes and profit splits based on trade performance.
Forex prop firms offer a wide range of trading platforms to trade on but are more expensive than Futures firms. The silver lining? They have a fixed drawdown.
For instance: You might spend $200 to get funded on a Futures firm and have $7,500 in trailing drawdown. A Forex prop firm might cost $400 but give you a fixed $10,000 drawdown:
This means if you give back some of your trade profits when trading forex, you’re not at risk of losing the account…
Because the $10,000 drawdown will stay in place, making it easier to reach a payout with your trades.
This is something to consider when paying the premium to trade with forex prop firms. How difficult do you want the trading challenge to be and how skilled are your trades?
Most forex prop firms removed their trade time limits, but be careful to read the rules because some still have 30 days to pass.
One main thing to check is a diverse range of tradable products and an unlimited scaling plan to trade.
This means you can trade without restriction on your number of contracts/lots.
CFD stands for Contract for Difference.
Essentially a CFD trade is a bet against your broker that your financial instrument will move in your predicted direction. Once the trade is closed, the difference in profit is paid to the winner.
Technically, “Forex Prop Firms” are in reality, “CFD Prop Firms.”
You can trade Forex or Stock Indices on either CFD or Futures Prop Firms, though!
Futures traders often prefer trading on Futures proprietary trading firms due to better financial instruments, profit splits, and access to various platforms when prop trading.
Usually, an Indicies trader will choose Futures and a Forex trader will trade using CFDs.
The reasoning behind these choices when prop trading?
There is a lot more volume in Forex CFDs than Futures Forex products…
And way more volume in Futures Indices than CFD Indices.
The more volume, the better the trade experience.
One benefit to CFD traders are the use of automated strategies or expert advisors.
EAs allow for easy automated trading are are utilized in platforms like MT4 and MT5.
For CFD trades there are also the choice of exotic forex pairs not offered on Futures proprietary trading firms.
Stock traders are out of luck, few if any stock trading prop firms exist to trade with.
People have asked for a stock trading prop firm but as of now, there are only forex and Futures financial institutions.
This is a shame for stock traders as profit splits for funded traders can be very lucrative vs trading your own capital.
But if you want to trade stocks you have to go the old-fashioned way for now.
It used to be the case that traders had to either work on Wall Street and trade for an investment bank or painstakingly grow their own small accounts if they wanted to trade with larger capital.
Funding Companies bypass this tedious process… and get profitable traders trading size much faster with their funded trade accounts.
Funded trader program evaluations are cheap vs the drawdown available once funded.
Apex Trader Funding is an example of a premier proprietary trading firm specializing in Futures trading, offering a unique profit-sharing model where traders retain 100% of their first $25,000 in profits.
This provides asymmetric returns to profitable traders!
It makes sense then, that many retail traders seek to trade with prop firms instead of risking their own capital.
Not usually! Some fly-by-night firms pop up and rug pull within a few months… that’s why it’s important to stick with bigger, tried and tested prop firms.
The main question is: where do the funded account payouts come from?
For most prop firms, the payouts come from other traders’ trade evaluation fees.
The reason this is sustainable is because just like the real market, 95% of traders are consistent losers!
With many losing traders taking multiple evaluations and resets, the prop firm profits are large enough to sustainably pay out winning traders, leaving large profits for the company, too.
The majority of “funded traders” are indeed getting paid their profit splits from other client funds while they trade their funded accounts…
However, some traders who make consistent winning trades get moved by some prop firms to live accounts. These traders must adhere to strict trade rules, including trade size, daily max loss limits, and other trading rules that ensure they operate within the firm's trade guidelines.
Moving a trader to the live markets means their payouts come directly from the market and not from other client funds when prop trading.
Prop firms will do this so the profitable trader doesn’t eat into the company's profit margins.
Instead, they back the trader and take a small percentage of the trader's winnings.