Prop Firms (Funded Accounts)

⦁ Prop firms offer traders the opportunity to trade for them using the firm’s capital with a low entry cost barrier

⦁ Prop firms provide traders with capital they can use to trade futures or forex (cfds)

⦁ There is a profit split between the trader and firm (Most firms provide a 80/20 split, however there are firms that provide splits up to 90/10 or have a certain set of rules) How Do Prop Firms Work?

⦁ Traders pay a fee for a firm’s evaluation, if the trader passes the firm's evaluation they gain access to a funded account that contains capital (sim or live) provided by the firm and allows traders to make a profit from markets risking the firm's trading account

⦁ The trader's risk is whatever amount they invest in the prop firm ⦁ If the trader fails the evaluation they do not receive any compensation (the money paid for the challenge remains with the firm, but if the trader passes the evaluation they become funded with the firm and can use their funded account to make a profit)

⦁ All firms have their own rules, a breach of any rule typically results in the termination of the trader’s evaluation or funded account

Prop Firm Drawdown

⦁ Prop firms have an amount of money they allow their traders to lose before terminating an account - this is known as a drawdown

⦁ If the drawdown limit is reached during the evaluation or while trading a funded account, the account gets terminated

⦁ A max drawdown is the main difference that separates a funded account from a personal account as personal accounts have no loss limit

⦁ Typically prop firms have a drawdown of 2% to 4% per account size

⦁ Some firms have a daily loss limit (how much a trader is allowed to lose per day) & all firms have a max drawdown (how much a trader is allowed to lose in total)

⦁ There are different types of drawdown & varies per firm (static, end of day, intraday trailing)

⦁ Static = A set amount that does not trail. Ex) 25k account with a 1k static DD. If trader hits 24k the account is blown

⦁ EOD = Trails at the end of each day. Ex) 50k account with an EOD DD of 2k (48k). Trader profits 1k, EOD DD trails from 48k to 49k ⦁ Intraday Trailing = Trails unrealized profits. Ex) 50k account with a intraday trailing DD of 2.5k (47.5k). Trader enters a trade and is in profit 1k but does not close position. Trade goes to breakeven & trader exits. The account balance is at 50k but the drawdown is now trailed from 47.5k to 48.5k since the trader had an unrealized profit of 1k

Prop Firm Trading Execution

⦁ Each firm has their own platform and broker that provides their own individual data

⦁ Most futures firms offer tradovate (tradingview), ninjatrader, rithmic or dxfeed to execute trades

⦁ There are no greeks, iv, etc. with prop trading. There is only buy (long) & sell (short)

Prop Firm Pros

⦁ Trading someone else’s capital & not risking your own

⦁ Low Financial Commitment: Only risking the amount spent on evaluation

⦁ Leverage: Some firms allow stacking multiple accounts and copy trading across them

⦁ Some firms offer instant funded accounts (Tradeify + FundingTicks + Lucid) that do not have any evaluation but instead slightly stricter rules

Prop Firm Cons

⦁ Without a proper trading strategy & risk management, traders can end up in a cycle of failing the evaluations and buying resets → continuously spending money on firms

⦁ There is a split of profit

⦁ Traders that have poor risk management will suffer from the various types of drawdowns

⦁ The time it takes to get funded & paid out (The process is usually not instant)