Proprietary companies provide funding to profitable traders who lack proper capital to trade the markets or are looking for additional risk-free funds. The relationship between both parties is symbiotic as the profit split is both ways. The growing number of prop firms presents an excellent opportunity for any retail trader to manage over a million dollars in funded capital. Let us go through all the essential features of these funding firms and look at how investors can find one that matches their needs.
Working methodology of prop firms
As mentioned before, prop firms provide trading capital to market participants. The relationship is symbiotic, where both earn from the profit split made on the account. To be eligible for funding, traders have to show a good amount of profitability while following a strict set of rules.
The first assessment stage involves trading on a demo account and achieving a profit target of 8-10% while maintaining a similar drawdown value. The successful participants are promoted to the verification stage.
The profit targets are reduced to 5%, with the drawdown value remaining the same at 10%. Traders usually have a total of 60 days to achieve their goals at this step. Other than the general rules, restrictions on trading news, minimum holding duration, trading styles, etc., are also applicable.
After the verification, traders will get access to the live portfolio to trade real funds. The profits are then split at the end of the month depending on the amount set beforehand.
All the restrictions set by the companies are there to ensure that their capital is safe and traders have a good chance of passing.
Selecting the right option
As multiple companies set out different criteria, it can be confusing for many to find the best funding firm that matches their trading style
If you are an algo trader, check if the prop firm allows traders to use algorithms. Also, take note of the trading platform if it is compatible with your expert advisor. Some companies may demand that you share the source code of your algorithm or live and backtesting stats before beginning to trade live.
Some funding companies may restrict traders from holding their positions overnight or over the weekend. It can be a problem for swing traders who actively keep their trades open for an extensive duration. Head over to the FAQ section on the websites to see if swing trading is allowed for both the challenge and live account.
Choose an account value that you can easily handle. An initial amount is paid to the company, referred to as challenge fees. The cost increase with the capital value and is non-refundable if you lose the first stage, so choose wisely. It is also vital to note your psychology which will change drastically while trading with larger lot sizes.
The profit split can vary from 50 to 90% in the trader’s favor. Most prop companies can provide 90% immediately after a trader gets funded, while others would increase the ratio after observing consistency.
Prop companies offering an increase in the account value after you hit a particular target should be a priority. This way, traders do not have to buy a new challenge to trade big portfolios. It usually can take you 1-2 years to start from $10000 and make it up to $1 million or even more.
A dashboard can help you determine all the account metrics, analyze your errors, and increase profitability. Your risk: reward ratio, winning rate, best instruments, drawdown values, etc., are detailed neatly.
Image 1. A price action trader identifies the market structure on the H1 time frame on GBPUSD. The trend line suggests a bearish outlook where they take a short trade when the price touches the resistance. The risk-reward ratio is 1:2. A 1% risk on the position will allow them to earn 2% on a single execution.
The prop firm absorbs all the losses on the trading account. Traders do not have to risk their own capital, which helps keep a positive mindset.
The range of available instruments can depend on the prop firm and the broker they are using. Check to see if the assets you trade are available with the company.
A Small Tip
After getting funded, traders can immediately drop their lot size while generating a steady 1-2% each month in passive income. This will ensure that they are not putting excessive risk on the portfolio and do not hit the maximum drawdown value.
Are prop firms safe?
Traders should not dive straight into the challenge. Test your strategy on a demo account to see if you can follow the rules and restrictions set by the prop firms. The best companies have a solid reputation in the financial marketplace and are risk-free to trade with. Investors have zero downsides as the initial fee is refunded with the first profit split.