Deciding whether prop firms are worth it is not a simple “yes” or “no” answer—it depends on several factors. Which prop firm are you looking into? What broker do they work with? What trading limits apply? What fees do traders face? The value of a prop firm will vary for different traders, depending on their experience level and trading goals.

Let’s explore the world of prop trading further.

What Is Proprietary Trading?

While there are several prop firms to choose from, I will focus on one in particular: Proprietary trading firms (prop firms) are financial organizations that supply traders with capital to trade, in exchange for a portion of the profits they generate. Leading prop firms offer traders a live trading account, where they can keep 80-90% of the profits, depending on the firm’s specific policies. However, traders must first pass through an evaluation phase before they gain access to live trading.

Understanding the Evaluation Process

This process involves assessing a trader’s ability to generate profits through a demo account with specific performance goals. These goals may include:

• Profit Target: Traders are required to grow the demo account by a certain percentage from the initial balance.
• Daily Loss Limit: Trading is suspended if the account loses a certain percentage or dollar amount in a single day.
• Maximum Drawdown: The evaluation ends if the account balance falls by a predetermined percentage (usually 8-10%) from the starting amount.
• Maximum Winning Day: The largest profit in a single day should not exceed a specified percentage of the overall profit target to ensure consistent, sustainable performance over time.
• Trading Days: Some firms set a limit on the number of days within which the profit target must be achieved to demonstrate consistency.

Traders who succeed in the evaluation phase are granted access to a live account with a designated balance and must continue using the same risk management strategies they applied during the evaluation. Prop firms establish clear terms for payouts, allowing traders to decide how frequently they want to receive them. Typically, firms process payout requests within a few days.

What Are the Costs of Prop Trading?

Generally, the primary cost is the evaluation fee, which can vary from a few hundred to several thousand dollars, depending on the desired initial balance for the live account. Most prop firms offer traders multiple attempts without charging an additional fee. However, some firms may require a monthly payment once the trader progresses to the live account stage.

How Much Can I Earn from Prop Trading?

Traders typically receive a percentage of the profits, often between 80-90%. Top-tier prop firms in forex may begin traders with a lower percentage and increase it as they prove consistent profitability. The earning potential is significant, with successful traders receiving payouts ranging from tens of thousands to several hundred thousand dollars. For example, the largest recorded payout at FTMO, as of now, was $1.2 million. The actual profits a trader can make depend on the initial account balance, which generally ranges from $10k to $200k, with most firms adjusting the entrance fee according to the starting balance.

Exploring the Risks and Rewards of Trading with a Prop Firm

Pros

• Structure: The profit targets and risk management guidelines set by prop firms create a structured environment, helping traders stay focused and increase their chances of success.
• Profit Potential: The opportunity to access greater capital and keep a large portion of the profits are strong incentives for traders looking to join a prop firm.
• Support: Many prop firms provide educational resources and personalized coaching. Additionally, they promote collaboration and networking opportunities with other traders, which can be particularly advantageous.

Cons

• Evaluation Fee: This is typically the only upfront expense, but it can be a hurdle for some traders.
• Broker Restrictions: Traders are often required to use the prop firm’s selected broker, which could be disadvantageous if the broker has poor execution practices or charges higher spreads that affect the trader’s profitability.
• Trading Restrictions: Some prop firms set rules that may not suit every trader’s approach, such as restricting open positions over weekends or during major news events.
• Psychological Factors: Managing a larger balance in a live account can be mentally challenging for some traders, potentially affecting their performance.

Should I Choose a Prop Firm or Use Higher Leverage?

In regions such as the U.S., Canada, U.K., and E.U., where leverage is limited, a prop firm may provide more favorable conditions compared to trading with higher leverage in less regulated markets. Although some traders may seek higher leverage for the possibility of greater returns, this often comes with reduced regulatory safeguards.

Bottomline

Prop firms offer traders a valuable opportunity to access additional capital, boosting their potential for profits. Successfully completing a prop firm’s evaluation, which involves meeting profit targets within specific risk guidelines, is key. While using a prop firm’s broker may have both advantages and disadvantages, the structure, support, and regulatory framework offered by reputable firms can greatly enhance a trader’s chances of success.