What are Prop Firms and How Do They Work?

What are Prop Firms? How Do They Work?

Prop firms provide traders with opportunities to test their trading skills and strategies; once they prove their capabilities, they get a funded account ready for trading. In return, they split rewards with the service provider. For a long time, skilled traders struggled to access capital. However, things changed when prop firms emerged filling that market gap.

Traders can no longer blame the lack of funds for holding them back from career-changing gains. With prop firms, people from across the world can earn rewards for their trading skills and consistency.

How Do Prop Firms Work?

Prop firms give traders funded trading accounts on various trading platforms. However, they look for skills with successful strategies to benefit from reward splits. This way, both the trader and the firm can benefit from the business module.

Evaluation/Challenge Phase

FundingPips evaluation

On most prop firms' websites, ideally there are challenges or evaluations. Traders must pay a fee for one, depending on how much capital they want. This is where they prove their skills to make successful trades. The evaluation has objectives traders must meet before they get the funding they want. These include a profit target, daily and maximum loss limits, and others. Some prop firms might give the user several days to complete the challenge. However, there are firms that will offer unlimited time, like FundingPips.

When traders pass the challenge, they get to the funded, master, or trading account. If they fail the challenge, they lose only the initial fee. However, they can always improve and retake the challenge.

Funding Phase

After passing the evaluation phase, traders move to the funded phase. As a funded trader, one will no longer have a profit target. However, risk management rules, like daily and maximum loss limits might remain and even become tighter. Some prop firms will give traders unique rules, like a mandatory stop loss for every trade. Violation of any of these rules will usually lead to a loss of the account. Therefore, traders must pay keen attention to all the rules.

Furthermore, as a funded trader, they can grow their accounts’ balances by meeting certain requirements, like growing their balance by 10%. This means they can increase their buying power the more they trade profitably.

Prop Firm Challenge Types

2-Step Challenge

Traders have to pass two evaluations to get a funded account. The first checkpoint is the average 8% profit, while the maximum drawdown is 10% and the 5% daily loss limit. The minimum trading days are three. The same loss limit and other criteria are applied in the second step but the profit target decreases to 5%.

1-Step Challenge

This program has only one evaluation. The profit target is 10%, and the maximum drawdown limit is 6% with a 4% daily loss limit and a minimum of 3 trading days.

Zero (Instant Funding)

Traders get access to a funded account directly. The daily loss limit is 3%, while the maximum loss limit is 5%. They can earn a reward for consistency on FundingPips for example it is 15%.

Prop Firms’ Benefits

They offer many benefits, making them more attractive than regular brokers; the grandest attraction is not having to jeopardize any personal funds.

Access to Capital

The biggest prop firms' benefit is funded accounts. These firms give retail traders access to trading accounts and greatly boost their earnings. With such opportunities, trading can stop being just something they do on the side and become a source of income for profit-making skilled traders.

No risk for Traders

Another benefit of prop firm trading is that all traders might risk is the challenge fee. The firm takes on the biggest risk by offering funded trading accounts.

Trading with a traditional broker comes with a lot of risk on the trader's side. Because they deposit money to start trading. In case of any losses, traders bear most of it.

Access to Advanced Trading Tools

Trading with a prop firm gives traders access to advanced trading tools to analyze the markets and their performance. These include technical and fundamental analysis tools in addition to performance analysis tools. These are great for tracking and identifying areas that need improvements.

Access to Education

Another key benefit of prop firms is the wide range of educational resources. Since they bear most of the risk, prop firms go out of their way to offer traders the best in education. These include analysis articles, tutorials, and courses. Some even provide trading psychology and performance coaches.

Opportunities for Scaling

After becoming a funded trader with a prop firm, there are opportunities for scaling the account balance. Usually, the firm will give traders a 10% growth target. In this case, they might increase traders’ balance by a certain amount every time traders grow it by 10%.

How to Pass Prop Firm Challenge?

First, traders must understand the rules of the program they opt for. For example, if they choose an instant funding program, they must read the rules carefully, and pay attention to the maximum drawdown limit and daily loss limit.

Next, they should look at the profit target. Traders cannot and should not aim to hit the target in a day or a week. They should not leave their natural trading style. Only tweak their methods and divide their profit target by 22. This  gives traders a daily target. Now, every trader can easily track their daily progress. However, if they fail to achieve the daily target, they do not rush. They relax, and start the next day with a fresh mind. Henceforth, many firms offer psychological sessions and trading psychology material.

Conclusion

Prop firms have changed the face of retail trading by filling the capital gap. In today’s trading industry, traders only need to have the skills to grow an account, and a prop firm like FundingPips will give you the capital and support you. Join over 1,000,000 traders on FundingPips and get a profit split of up to 100%.

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