Imagine trading the markets with massive capital without risking your own savings. That’s exactly what prop firms offer. These firms provide traders with the funds they need to trade financial markets while recieving a percentage of the profits made by the trader in return.
What is a Prop Firm?
A prop firm is a company that funds traders to trade financial markets like forex, stocks, or cryptocurrencies. Traders use the firm’s capital, and in return, the firm takes a cut of the profits.
Let’s take that a step further.
How do Prop Firms Work?
Usually as a trader, befor you gets access to the company’s funds, you have to prove your trading skill by passing a 2 step evaluation. After the evaluation, you get into the next stage which is the Funded stage.
But first,
1. The Evaluation Phase: This is commonly known as the 2-step challenge/evaluation phase. This phase involves trading on a simulated account with specific rules. Each firm has its rules. For example, at FundedBits, you have to hit a profit target of 8% of your initial capital in the first stage and 5% in the second stage of the evaluation.
Some firms have 3 stages for their evaluation depending on the trader’s needs. Traders must pass this evaluation stage to prove their skills and to get funded.
2. Funding: Once the evaluation is passed, traders receive a funded account. All profits made on the capital at the funded stage is withdrawable.
For example, imagine Trader A purchases a $5,000 account from FundedBits for $57.
To pass Phase 1, they must generate $400 in profits (8% of the starting balance). Upon passing, their account will be reset to $5,000 for Phase 2, where they must achieve a $250 profit target (5% of the initial balance).
Once Phase 2 is completed, the trader gains access to a fully funded account, where all profits made on the $5,000 capital become withdrawable.
3. Profit Sharing: Profits are split between the trader and the firm, typically ranging from 70% to 90% in the favor of the trader. With FundedBits, we offer up to 90% profit share – where you keep 90%, we keep 10%.
Some firms also provide scaling plans, where traders can access larger accounts as they hit performance milestones. Payouts are typically made bi-weekly or monthly, with some firms offering fast payouts within seven days.
4. Trading Rules: You cant fully know about prop firms without knowing about trading rules. Prop firms enforce strict rules like daily loss limits, maximum drawdowns, and restrictions on trading during high-impact news events to protect their capital.
a. Daily Loss Limit
This is the maximum amount a trader can lose in a single day. If a trader exceeds this limit, their account may be breached, preventing further trading.
b. Maximum Drawdown
This refers to the total amount a trader can lose from their starting account balance. Some firms use static drawdown, which remains fixed, while others use trailing drawdown, which adjusts based on account performance.
c. Trading Time Restrictions
Some firms restrict trading during high-impact news events due to extreme volatility.
N.B: These aren’t the only rules , each firms has its own rules. When you start trading with a firm, it’s good practice to read the FAQs on their website as it always has the rules.
Challenges and Benefits
Benefits
- Access to Capital: Trade with large amounts of money without risking your own.
- Reduced Financial Risk: The firm’s capital is at risk, not yours.
- Professional Resources: Access to advanced tools, platforms, and mentorship.
- Profit Potential: Larger capital means bigger positions and higher profits.
The main challenge is Strict Rules: Some firms impose stringent rules like risk management rules that may limit flexibility.
Conclusion
Prop firms offer a unique opportunity for traders to access capital, reduce personal risk, and grow their trading careers. By understanding how prop firms work, their profit-sharing models, and the challenges involved, you can decide if this path is right for you.
If you’re ready to take the next step, kindly go to<our link> to get yourself an account.