FAQs
Find answers to frequently asked questions relating to prop firms and prop trading.
What is a prop firm?
A prop firm, or proprietary trading firm, is a company that allows traders to trade with the firm’s capital rather than their own. Traders are required to pass a trading evaluation or challenge to prove their skills. Once funded, traders keep a percentage of the profits while the firm absorbs the losses.
How do I get funded by a prop firm?
To get funded, traders usually need to pass a two-step evaluation process. This typically involves meeting profit targets and adhering to risk management rules such as maximum daily loss or drawdown limits. Upon successful completion, traders are granted access to a live trading account funded by the prop firm.
How soon can I start trading with real funds after passing the evaluation?
Once you pass the evaluation, the onboarding process usually takes a few days. After that, you can start trading with the firm’s capital. The exact timeline varies by firm.
Are there any restrictions on trading strategies?
Yes, some prop firms have restrictions on certain trading strategies. For example, high-frequency trading, news trading, and arbitrage strategies may be prohibited. It’s important to check each firm’s specific rules regarding trading strategies.
How do prop firms make money?
Prop firms make money through evaluation fees, profit splits, and, in some cases, by retaining a portion of the spreads or commissions charged by the brokers they work with. They also benefit when traders generate consistent profits without breaching their risk management rules.
What are the costs involved in joining a prop firm?
Most prop firms charge an upfront fee for participating in the evaluation process. This fee varies depending on the firm and the size of the account you’re aiming to trade. In some cases, these fees may be refundable after passing the evaluation.
What happens if I fail the evaluation?
If you fail the evaluation by breaching a rule or not meeting the profit target within the allotted time, you typically need to pay the evaluation fee again to restart the process. Some firms offer discounts or retry options for a lower fee.
What is the profit split with the prop firm?
The profit split is the percentage of profits that the trader keeps. Most prop firms offer profit splits ranging from 70% to 90%, with some firms offering even higher splits depending on the trader’s performance and account size.
What are the risks of trading with a prop firm?
The main risks include losing your evaluation fee if you fail the challenge, and the pressure of adhering to strict risk management rules. However, since you are not trading your own capital, the risk of financial loss is significantly reduced compared to trading independently.
What are the typical drawdown rules?
Drawdown rules vary but typically include a maximum daily drawdown and a maximum overall drawdown. For example, a firm may allow a maximum daily drawdown of 5% and a maximum overall drawdown of 10%. If you exceed these limits, you may fail the evaluation or lose access to your funded account.
