More and more experienced traders are turning to proprietary trading firms in order to fund their trading strategies.
The advantages are obvious. You can trade someone else’s money, keep a hefty percentage of your profits, and walk away from any losses.
Of course, a deal like that doesn’t come without strings attached, so it is imperative that you choose the right firm to set up your funded account.
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Prop Firm Match
Honestly, with the incredible number of new firms entering the prop space, I’m struggling to keep up. Although I disagree with some of their “favorite firms,” I love Prop Firm Match for their comparison tools. Here’s a screenshot:
Screenshot of Prop Firm Match’s excellent comparison tool.
They’ve made prop firm comparisons extremely simple, and allow you to prioritize what’s most important to you as an individual trader when choosing between the 100s of firms that are out there now. I can’t compete with that, so I recommend Prop Firm Match — if you can’t beat them join them, I guess.
Comparing my favorite prop firms
Capitalism 101 says that the consumer benefits from more competition in the marketplace, but that is not necessarily true when it comes to prop firms. There are a lot of new prop firms who fail as quickly as the open, stealing a lot of hard work and hard-earned profits from traders in the process.
The incredible influx of newcomers, the ease with which anyone can set up a prop firm, and ongoing regulatory uncertainty all pushes me in one direction — the tried and true firms who won’t disappear with a Twitter apology.
Here’s a brief comparison of my favorite prop firms:
(This summary is updated; however, rules frequently change. Always confirm rules with your prop firm.)
Prop trading made simple
For those of you who are new to the prop trading world, here’s a few questions and answers to help you understand the basics. Please post any further questions you may have in the comments, and I’ll add them to this list and answer them.
What is prop trading?
Proprietary trading is any trading that occurs with one’s own money. A prop trading firm, therefore, is a firm that trades its own capital. Some prop trading firms (like those listed above) have funded trader programs, which provides capital to any traders who prove they have safe, profitable trading strategies.
How does prop trading work?
Prop trading firms will give up to $1 million of their capital to fund good traders. The firm and traders will then split any profits that are made, with the trader keeping anywhere between 50%-90%, depending on the firm. If the trader incurs losses, the firm will pay off those losses, but the trader will more than likely lose their account.
Of course prop firms aren’t just carelessly giving out their money. With most firms, traders must undergo a two-stage evaluation to prove their trading strategy before they get any capital. Traders who meet profit targets and abide by the firm’s trading rules and risk management practices will then become funded traders.
Funded traders split any profits they make with their prop firm, but usually keep the lion’s share for themselves. Funded traders still have to abide by the prop firm’s trading rules, or their account will be suspended and they will have to go back through the evaluation process all over again.
How do I get instant funding from a prop firm?
There are some prop firms out there that will give you instant funding. That’s right, they will just give you capital without any evaluation. What’s the catch? The catch is that you’ll split the profits 50/50 with the firm, rather than keeping 80%-90% like you would with an evaluation-based prop firm. Instant funding prop firms also typically charge quite a bit more, but that’s the cost of getting into the market in a matter of hours rather than after several weeks or more of evaluations.
What are typical prop firm trading rules?
All prop firms have different rules, which makes it incredibly important that you study them carefully before signing up. These rules are designed to test your risk management skills before the prop firm commits to giving you real money.
All prop firms have a max loss limit as one of their rules. If you lose a certain amount, you will lose the challenge or forfeit your account if you are already funded. Seems simple enough, but some firms calculate this limit differently than others.
For example, say a firm says you can’t lose 5% of your account before they suspend it. For some firms that simply means you can’t lose 5% of your initial balance. So with a $100,000 account, if you lose more than $5,000 and it dips below $95,000 you’re done. Very simple.
But other firms use “trailing maximum drawdowns” or “relative maximum drawdowns” to determine your maximum loss. Those are both complicated sounding terms that mean your maximum loss is taken from your highest account balance, not your initial balance. So if you made $1,000 on your first day trading with a $100,000 account, your account is at $101,000. Now, you can’t lose more than 5% of $101,000. The bar has moved and now if your account dips below $95,950, you’re done.
That might seem unfair to a lot of traders, because potentially, you could make 7% profit on your first day, lose 5% on the second and lose your account, even though you are up 2% overall. That might not seem right, since you’re still in the green, but prop trading firms want consistency out of their traders. A trader that’s up big one day and down big the next is not someone they want to give their capital to.
A lot of firms also have daily maximum loss limits as well as overall maximum loss limits. The daily maximum loss is often quite a bit lower than the overall mark. FTMO, for example, allows you to lose up to 10% overall on your account before they pull the plug, but you can’t lose more than 5% in a single day. Again, prop trading firms want consistency.
Prop firms also might have mandatory stop loss limits with every trade, prohibit trading around major news releases, prohibit holding positions over nights or weekends or any number of other rules.
The point is, you absolutely must understand the rules before you begin trading.
What’s the best way to choose a prop trading firm?
There’s a lot of things to consider when you’re choosing a prop trading firm. You need to find a firm you can trust that offers the financial instruments you wish to trade and has trading rules you understand and can abide by. After you check those boxes, you can look at how long your evaluation is going to take, what your profit split might be, how much the firm charges, and whether or not they have any current promotions or discounts. Consult my Best Prop Trading Firms of 2023 for more personal choices.
What are the advantages of prop trading?
The most obvious advantage of using a prop trading firm is capital. If you have a trading strategy but no money to fund it, a prop firm can step in and give you that capital. Yes, you’ll have to split the profits, but usually you’ll keep the bulk of what you make.
Prop firms also allow you to test your trading strategies without putting too much of your own money on the line. For example, if you’ve studied futures and think you have a good strategy, you can put your own money on the line, or you can risk a prop firm’s money. If you don’t have money to burn, a prop firm will give you a lot of the upside and limit how much cash you risk. If you fail, you’ll fail cheaply.
Good prop firms also offer educational resources, mentoring, and an active trading community.
What are the disadvantages of prop trading?
The biggest disadvantage of prop trading is that you can pay a sign-up fee and dedicate a significant amount of your time to trading, but never see any profits. If you sign up with a proprietary trading firm that requires an evaluation, there’s a good chance you don’t pass, regardless of your skill level, and all that time is wasted. Profitably trading is very difficult. Even the best strategies don’t always work, and if you fail, you’re left with nothing for your efforts.
Another big disadvantage is that signing up with a prop firm means abiding by someone else’s trading rules. This makes sense since you’re trading their money, but it means you won’t have complete freedom like you would with your own capital.
What other types of prop firms are there?
Beyond the prop firms that we’ve been talking about, there are also prop firms that actually hire traders, pay them a salary and benefits, and then offer them a bonus based on their trading performance. I call them Wall Street prop firms, although they are just as often based in Chicago or Amsterdam, then New York City.
Examples of “Wall Street prop firms” are:
Flow Traders: Specializes in high frequency and quantitative trading strategies. Founded in Amsterdam
Akuna Capital: Focuses on quantitative derivatives trading strategies. Based in Chicago.
Akuna Capital: Focuses on quantitative derivatives trading strategies. Based in Chicago.
Belvedere Trading: Specializes in equity index and commodity derivatives. Based in Chicago.
IMC Financial Markets: Global technologically driven market maker. Based in Amsterdam.
Wall Street prop firms are often focused on automated trading strategies and hire people with backgrounds in mathematics and computer science. Getting a trading job with them is extremely difficult and usually requires an outstanding academic background. Not all hope is lost, however. Recently some Wall Street prop firms have been going to greater lengths to try and identify prospective traders who wouldn’t otherwise be recruited.
IMC Financial Markets, for example, has a “Traders Challenge,” but it’s nothing like the FTMO Challenge, or other trader evaluations from prop firms that fund traders. Instead, it’s a brain test that measures “the biological building blocks of performance based on brain functions.” Find the IMC Financial Markets Traders Challenge here, if you’re interested in joining a Wall Street prop firm.
If your brain test doesn’t immediately qualify you for a Wall Street prop firm, there’s still plenty of opportunities with the prop firms from the chart above.
Prop Trading Firm Comparison
