What Is a Prop Firm?

The prop firm industry has been booming lately because more traders are choosing such firms to trade a larger capital without the need to use the personal fund to trade with a broker. Prop firms allow small retail traders to leverage their trading skills for bigger profits that they had only dreamed of in the past. Let’s clearly find out what a prop firm is, so we know how to best be involved in this business.  

1. What Is a Prop Firm? 

A prop firm (proprietary trading firm) is a company that gives traders its own money to trade, and then shares the profits with them. Some firms provide simulated funds to traders to trade while some firms provide real funds to traders. Certain firms practice coordinated trade copying to their real funds on brokerages. A trader pays a fee to buy a challenge or funded account and then trade the accounts until they get the payout without breaking the rules. Prop firms regard their funded traders as their employees that manage funds for them. 

While trading on a prop firm employs the company fund, trading on retail brokerage accounts requires traders to deposit their own fund to trade with allowed leverage. Traders have more freedom trading their personal accounts while trading on a prop firm emphasizes stricter risk management like daily drawdown limit, max drawdown limit, news trading, lot size limit, etc. If these rules are broken, the prop firm traders will lose their accounts. If they want to continue trading, they need to buy new accounts or pay the fee to reset the breached account. While certain freedom is stripped off, prop firms often condition a retail trader to respect the rules used by a professional traders. However, it means that success in prop firms is even harder. 

Contemporary prop firms do not operate in the same fashion as old-school Wall Street prop desks. Traders first prove their skills through a paid evaluation by trading on a simulated account, hitting a profit target while respecting all risk rules (max daily loss, max drawdown, SL rules, etc.). Most modern prop firms do not set the time limit for traders to hit profit targets. After passing the evaluation stage, usually consisting of one or two phases, traders proceed to the funded stage. At the funded stage, some firms still let the traders to trade simulated funds while some allow traders to trade with real funds. Again, the strict risk limits are still in place. After a profit is made, the traders may receive the profit share, commonly 70-90% of the total gained profit. 

2. How Prop Firms Work

There are two main paths to a funded stage on a modern prop firm. The first model is by passing the challenge phase consisting of one or two steps, sometimes up to 3 steps, specific to the firm. Traders are required to trade for a certain target profit like 8% or 10% while following all the rules set by the firms before they receive the funded account where they start to trade for a profit share. The other modern path is by going straight to a funded stage or so called instant funded account. 

A trader is required to open an account with the firm using an email address and go through the KYC process (Know Your Customer) to make sure they are compliant. A trader must be 18 years old or more to trade a prop firm. Prop firms have a strict rule of a person that trades his/her account. Letting another person trade for you is a big penalty. If found, the account will be terminated immediately. Prop firms focus on building real trading skills for individuals. 

The core of a prop firm trading is the risk management rules and its monitoring system on all trading accounts under it. It has an automated monitoring system such as daily loss limit, maximum loss limit. When these rules are broken, the accounts will be breached instantly. As a prop firm trader, you must understand such rules very clearly. Such rules exist to limit downside exposure of the firm’s fund and to curb traders to comply with a sound risk management. Most firms have similar basic rules such as daily loss limit, maximum loss limit, news trading, expert advisor usage and more.

3. How Prop Firm Challenges Work

Most firms sell their challenge accounts to traders in accessible countries. Some sell instant-funded accounts (direct to funded). The main purpose of a prop firm challenge is to test a trader whether they can manage funds consistently or not, so that they can manage the firm’s real fund with the lowest risk. 

Typically, prop firms set daily loss limits. This limit gets reset daily at the daily market close and start. For a 2-stage challenge, most firms set a daily loss limit between 4-5%. The maximum loss limit ranges from 8-10%. Currently, prop firms no longer restrict the time limit for traders to complete their challenge phase; they can trade as long as they can to pass the profit target. 

Most firms set minimum trading days. For some firms, a trading day is the day where a trader places a trade or more. For some firms, the minimum trading day refers to the day that a trader places trades and manages to make profit at least 0.5-1% of their initial account balance. 

To survive in a prop firm trading, a trader must adhere to all the rules. Be careful with the firms that hide their rules. Only when you pass your profit target or get to the payout that they tell you that you have breached some hidden rules. Those rules are sometimes unambiguously written in the contract or FAQs page. Such hidden rules are the big red flag. Be careful to choose only the firms with full transparency. We have reviewed top recommended prop firms for beginners in this article. We also wrote a prop trader beginner’s guide on this article to help traders survive and make payouts with prop firms. 

4. How Traders Make Money 

In prop firm trading, a trader can make money from sharing the profit with the firm, usually between 70% to 90% of the profit made during the payout. Most firms offer 80% profit split for a regular 2-step challenge. To request a payout, you have to fulfill all the conditions varied by firms. Some firms require minimum trading days or minimum profitable days. A trader is able to request a payout in a cycle, usually bi-weekly, monthly, some firms even offering a weekly payout cycle. Certain firms have specific requirements like consistency scores. Make sure you study their specific requirements meticulously before starting a firm challenge so that you don’t get confused when it’s time for payout. You can get a payout through several methods. Most firms offer the payout through cryptocurrencies with limits. All firms usually offer the payout through Rise (Riseworks), by which you can get paid without limit. Riseworks allows you to withdraw money through stable cryptocurrency such as USDC and through bank transfer around the world. 

You don’t just trade your same funded account forever. All firms have scaling plans for a long-term consistent trader. Some offer the scaling plans up to millions of funded capital. The key is whether you are able to be consistent in your trading performance or not. 

Bear in mind that prop firms are not a bank or a broker. Your money is in the hands of a group of people. Not all payouts are withdrawn smoothly even though you don’t break the daily loss limit and maximum loss limit. There are some common reasons. The first is a firm being simply an outright scammer. A scam prop firm is usually run by a few individuals that hide their identity. They do some crazy promotion or discounts to get traders to buy the challenges. When it’s time for payout, they just reject them for whatever reasons they claim. Reputation matters a lot in this industry. Never believe an abnormal promotion. 

Use this as a benchmark. A profitable prop firm usually survives and grows with around 500$ for 100K challenge accounts, not something far from this benchmark. Secondly, some firms have very complicated rules to the point that you are not able to grasp them all. They may hide their rules on the signing contract when you get a funded account. Always look for a firm that is fully transparent about their rules. Prop firm industry still lacks a full regulatory control by the government although they are registered as a company within a jurisdiction, but they are not under strong financial regulations like FCA, CFTC, CySEC, etc. because they don’t hold clients’ deposits. They are more like a training program. Mostly, these firms operate on reputation-based principle to gain trust from the traders because there are many prop firm review sources out there. 

5. Are Prop Firms Good for Beginners? 

The short answer is YES! If you want a large capital access, a prop firm account is a good start. Limited capital using personal fund usually causes a trader to lose patience in execution. Starting a prop firm is a good training ground towards managing large personal funds on real brokers. 

Moreover, prop firm rules set your trading towards a sound risk management and consistency. Those rules help train you to become a professional fund manager. Prop firms are open to everyone, regardless of their skill levels, as long as they are at least 18 years old. Small challenges like 5000 USD, 10K USD are a good start for beginners to train themselves towards a lifelong trading career. You can always scale as you progress by buying more challenges later. Compared to a personal fund account, trading in a prop firm usually causes lower mental pressure, which is the key to profitable trading while managing a big capital. If you are just getting started in trading having very little trading experience, I recommend never starting with a big account like 100K or 200K. Start small and build the skill first. 

Final Thoughts

Prop firms exist to give the opportunities to small retail traders to access big capital and make a lot of profit. The key is that as a trader, you must follow their rules strictly and choose the best firms that are trusted and reputable. Before you get started, educate yourself about your trading strategy and think of a prop firm as a practicing ground. If you want to get started with the highest chance of success, go read my prop firm beginner’s guide here. Make sure you understand the prop firm rules very clearly. Read their FAQ section thoroughly and if you still have doubt about any rules, do not hesitate to have a chat with the prop firm support. Never think of a prop firm as a get-rich-quick scheme. Think of it as the training program to become a profitable trader. One more thing is to start small and scale larger when you are on the next level. Lastly, always accumulate some funds for personal brokerage accounts. It’s more reliable in the long run.