Are you curious about how professional traders make money from the markets, but not sure where to start? Or maybe you’ve heard about prop firms but don’t fully understand what they are or how they work? Don’t worry, you’re not alone!
In this beginner’s guide, we’ll break down what prop firms are, how they work, and how you can get involved—even if you're just starting your trading journey. Let’s dive in and make this fun and easy to understand!
What is a Prop Firm?
A prop firm (short for proprietary trading firm) is a company that trades financial markets using its own money (not clients’ money) to make profits. The exciting part? They hire traders like you to trade on their behalf. Essentially, you use their capital to make trades, and in return, you get a share of the profits you generate.
Example: Let’s say you’re hired by a prop firm. They give you $100,000 to trade with. You make a profit of $10,000. The firm might take 20% of that profit, but you get to keep 80%.
However, a lot of prop firms often provide training, support, and resources to help you improve your trading skills.
How Do Prop Firms Make Money?
Prop firms make money by taking a cut of the profits their traders generate. The better you are at trading, the more money the firm earns, and the more you earn in return. It’s a win-win situation—you both benefit from good performance.
However, here’s where the reality check comes in: prop firms make a significant portion of their money from traders who fail their evaluations. Let me explain.
Most prop firms require you to pass a trading challenge or evaluation before they give you their capital to trade with. This is designed to assess your skills and risk management. Here’s the catch: a lot of traders fail these evaluations, and that's how prop firms profit from the upfront fees they charge for these challenges.
While this might sound a bit harsh, it's important to recognize that the challenge can be tough by design—it’s how these firms minimize their risk and ensure they only give funded accounts to traders who can manage it well.
So, while the evaluation process is an opportunity for you to prove your skills, don’t expect it to be handed it to you. Many traders fail simply because they don’t follow the strict risk management rules, or they try to chase profits too aggressively. Prop firms know this, which is why they make money from the fees paid by traders who don’t pass the test.
How Do You Get Started with a Prop Firm?
Choose the Right Prop Firm
Before anything, research the best prop firms that fit your trading style and goals. Some prop firms focus on futures trading, while others specialize in stocks or forex. Some well-known prop firms include Apex Trader Funding, MyFundedFutres, and TradeDay.Pass a Challenge (or Evaluation)
Most prop firms require you to pass a trading challenge or evaluation before they give you their capital to trade with. This is designed to test your skills and risk management. For example, you might need to grow a demo account by 10% but can’t lose more than 5% of it. It’s a way for the firm to ensure you’re a responsible and capable trader.But again, let me reiterate—most traders fail these evaluations. It’s tough, and the rules are strict. Prop firms make a big chunk of their money from the evaluation fees paid by traders who don’t make it through. This is a key part of the prop firm business model.
The Challenge: You need to meet profit targets while adhering to strict risk management rules.
The Reality: Many traders, especially beginners, fail because they take too much risk or fail to hit the profit targets. Prop firms know that and factor it into their model. So, while they offer the potential to trade with real money, they also profit heavily from traders who don’t pass.
Start Trading with Real Capital
Once you pass the evaluation, the firm will fund you with real capital to trade. You’ll follow their risk rules (e.g., maximum daily drawdown limits) and trade their money, but you get to keep majority of the profits!
Key Features of Prop Firms You Should Know
Leverage
Prop firms often offer high leverage, which means you can control more capital than you deposit. For example, if you have $10,000 and the firm offers 10x leverage, you can trade with $100,000. While leverage can increase your profits, it also increases risk, so it’s important to manage it carefully.Profit Sharing
The profit-sharing agreement can vary from one firm to another. Generally, the trader keeps a percentage of the profits they make. Some firms offer 70% to 80% of the profits, while others may go as high as 90%—the better the agreement, the more you’ll earn!Risk Management
Prop firms have strict risk management rules to protect their capital. For example, they may set a daily or weekly loss limit (like you can’t lose more than 1% of the account balance in a single day). These rules are important because they ensure that you don’t risk too much and blow up your account.No Personal Risk
One of the best things about trading with a prop firm is that you don’t risk your own money. If you make mistakes, you don’t lose your savings or personal funds. Your job is to focus on making consistent profits while following the rules.Training and Support
Many prop firms offer training programs to help you improve your skills, strategies, and market knowledge. Some even provide mentorship and support from experienced traders. This is a great opportunity for beginners to learn the ropes of trading without feeling overwhelmed.
Pros and Cons of Trading with Prop Firms
Pros:
No personal financial risk: You trade with the firm’s capital.
Access to larger capital: You can trade with more money than you would be able to personally.
Profit-sharing: You get to keep a percentage of your profits.
Learning opportunities: Many prop firms offer training, resources, and mentoring.
Cons:
Challenges and evaluations: You have to pass a test to prove your skills.
Strict risk management: The firm’s rules might feel limiting if you're a risk-taker.
Fees: Some firms charge an upfront fee for the evaluation or to access tools.
The risk of failure: Many traders fail their evaluations—this is how prop firms make much of their money.
Tips for Succeeding in a Prop Firm
Master Risk Management
This is the most important part of trading. You can’t make money if you blow up your account! Stick to the firm’s rules and always trade with a clear risk management strategy.Start Slow
Especially if you're new, focus on consistency over big profits. Slowly build up your skills and profits over time. Trading is a marathon, not a sprint!Take Advantage of Training
If the firm offers educational resources or mentorship, take full advantage of them! These programs can dramatically improve your trading knowledge and skills.Stay Disciplined
Trading requires mental discipline. Stick to your strategy and avoid emotional decisions. Trading with someone else's money is a privilege, so treat it seriously!
In Conclusion
Prop firms are a great opportunity for beginner traders to start trading with real capital and make money without risking their own savings. But it’s important to recognize that many traders fail the evaluation, and prop firms make a large portion of their income from these failed attempts. However, if you can make it through the evaluation and follow the rules, the rewards can be significant.
So, if you’ve been thinking about jumping into trading but didn’t know how, a prop firm could be the perfect way to get started!
Top two recommended prop firms I personally use: