Should you trade with a prop firm or your own money? - Pipsmashers (2024)

If you are justgetting started in forex, I believe you must have been told that you need a lot of money for trading (some traders will dispute this). But let’s face it. Not every one of us has thousands of dollars to invest in a trading account. This is where prop firms come in.

Prop firms, also known as proprietary trading firms, are financial organizations that fund traders to trade financial assets (stocks, currencies, commodities, or crypto) with a view of profit sharing.

This capability has led some traders to opt for prop firms as their way to financial freedom via forex.

So a few months ago I decided to sign up for FundedNext’s $15k challenge, and having made some wins and losses, I saw it wise to share my views on how to trade with a prop firm with this post.

Why choose a prop firm?

There are so many prop firms out there offering traders different kinds of accounts/challenges starting from $5k to $600k. These cost somewhere between $50 to $714. For example,TopTierTrader’s $100k challenge account costs $476.

Earn more money

Even though you are given a simulated account, the 70% to 90% percent profit split offered by most prop firms makes it more lucrative and economical if you do not have enough money for trading.

Challenges to consider

As much as you may have lots of ‘capital’ to trade, there are a few things to consider before you trade with a prop firm or purchase any challenge account.

You aren’t really given a real account

The reality about most prop firms is that they won’t give you a real account to trade on. Once you have signed up for a new challenge, you are given a simulation account (what they call a challenge account). And even if you pass the challenge, you would still trade on the simulation account. The good thing is that you will receive your profits as per the agreement.

Profit is shared

Traders take 90% or 80% of the profits (depending on the type of prop firm) unlike if you had your own account where would enjoy all the profits. Even so, the returns are still generous if you compare them to trading on a live $100 or $500-dollar account.

Some rules aren’t really that clear, especially on daily loss

I find that some rules aren’t clear. For example, most prop firms will automatically deactivate your account if you hit the maximum draw-down. But what happens when you, unfortunately, hit the minimum daily loss while still in profit? Do you also lose the account? Unfortunately, that is the case, but this is not clearly stated on their FAQs page.

For example, assume you have a $15k challenge account, a max loss of 10%, and a daily loss of 5%. You have grown it to $17, 746. Then, on one day, things go bad for you, and you hit your minimum draw-down (let’s say 5%) of $17, 746, which is around $887. Should you lose the account yet you haven’t hit the max loss of $1774.6? Or should it be $3274.6?

I think that if your trading account is still in profits or you still haven’t hit your max loss (which most prop firms set at 10%), your account should not be terminated.

Another thing is some policies are not transparent or prominently displayed on their website, most especially trading activity. For example, some prop firms do not allow stacking trades, but haven’t mentioned it on their FAQs.

I think that all policies should be clearly displayed on the website. Not that after you have passed a challenge is when you are told you can’t get a ‘funded account’ because you violated a policy that wasn’t clear stated in their documentation.

Beware of Fake Prop Firms

A huge factor that makes some traders not trade with a prop firm is that there are no proper regulations on prop firms’ activities in most jurisdictions. Yes, so if the firm goes under, there is nothing you can do about your money. I have also heard stories of some prop firms slowing load times when you want to enter or exit a trade or withholding profits.

Which are the reputable prop firms

Finding a reputable prop firm is extremely important—one that doesn’t slow server load times, or with rules designed to make you fail (hard profit targets, unreasonable time limits to pass a challenge, or hard draw-down rules), or go under without notice. Here is a list of reputable prop firms you can trade with.

Moving beyond prop firms

First, you really don’t need a lot of money to trade Forex/CDFs. What matters is yourexperience and practicing risk management. In forex, if you don’t have proper risk management skills, you will still lose money.

Thinking that having a lot of money to trade may be a terrible idea. And let’s face it; most stats shared by even prop firms shows that less than 10% of traders proceed to a funded account. Besides, few manage to keep their accounts for long.

That is why I still think that trading with your money (or an instant funded account) is the smartest way to make it in forex. It molds you differently, unlike in an evaluation account of prop firms. Just remember to always start small and build from there. Besides, risk is everything. You are better off losing a small amount at the beginning and not all your capital.

Should you trade with a prop firm or your own money? - Pipsmashers (2024)

FAQs

Is it better to trade with a prop firm or trade your own money? ›

Prop firms offer access to larger accounts for relatively low capital outlay, but you're also on a shorter leash. Trading your own money means total control of how you want to trade, but the trade-offs for that control may not be for everyone.

Do prop firms give real money to trade with? ›

In a typical challenge model, the prop firm will give the trader a certain amount of virtual money to trade with. The trader will then have to meet certain profit targets in order to pass the challenge. Once they pass the challenge, they will be given a funded account that they can use to trade with real money.

What are the disadvantages of prop firms? ›

Among many other potential factors, the main disadvantages of prop trading arise from being classified as a market professional, unfavorable profit sharing, and whether your net trading profits are taxed as capital gains or ordinary personal income.

Is working with a prop firm worth it? ›

Is working with a prop firm worth it? There are many unique advantages that make working with a prop firm worth it. These include access to unique software and information, trading with the firm's capital, and cashing in a large portion of your winnings.

Can you make a living with prop trading? ›

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity. It's arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you'll earn some percentage of it.

Why is proprietary trading bad? ›

Personal Risk: One of the significant drawbacks of prop trading is the potential personal financial risk. If a trader doesn't perform well, they may lose their deposit, and in some cases, their job. Loss Limitations: Prop firms often implement daily loss limits to protect their capital.

How much does the average prop trader make? ›

The salary of a prop trader can vary greatly depending on several factors such as experience, performance, and the size of the firm. On average, a junior prop trader can expect to earn anywhere between $50,000 to $100,000 per year, while a senior trader can make upwards of $500,000 annually.

What happens if you lose prop firm money? ›

Proprietary trading firms often provide evaluation accounts where you prove your trading skills. Usually, you pay a one-time fee to enter this “challenge.” If you lose money during this evaluation, you won't owe anything beyond the initial fee.

Do prop firms copy your trade? ›

The prop firm will then copy the trades using a combination of automated and discretionary decision-making to execute the trades for real, enabling them to make a profit or loss without any risk to the trader.

Are prop firms a pyramid? ›

Some prop firms have a pyramid scheme where fellow traders persuade others to join the program and invest their money in it.

How many people fail prop firms? ›

According to it, 4% of traders, on average, pass prop firm challenges. But only 1% of traders kept their funded accounts for a reasonable amount of time. While this result is not nearly as bad as the one discussed earlier, it still looks bleak for prospective prop traders. But why is the percentage of failure so high?

Is prop trading better than hedge fund? ›

Hedge funds are a much safer investment when you are uncertain as an investor. Even though prop trading is the same, it is much riskier as you are using a prop firm's money to profit. Leverage: When it comes to leverage, hedge funds use aggressive techniques to manage their assets.

Do prop firms really pay out? ›

Statistics on Average Trader Payouts

Profit Split: The average prop firm will offer a 80-20 profit split once you become a funded trader. TFT, on the other hand, gives up to a 90% split, — even as high as 95% in some promotions — the highest in the industry.

How much money to start a prop trading firm? ›

The Costs of Prop Firm Regulation & Company Registration

Some prop firms may opt to be regulated which puts costs significantly higher. One should expect to pay a one time fee of around $10,000 for company registration and payment options while regulation involves a minimum budget of $75,000.

How hard is prop trading? ›

Breaking into proprietary trading firms can be challenging, with factors like education, skills, networking, and persistence playing key roles.

What is prop trading vs personal trading? ›

One of the main differences between the two accounts is whether you require a license to trade. Professional trading requires licensing, which means the people making trades on your behalf—or you, if you're a prop trader—may be required to obtain a securities license for a prop trading account.

Is it better to be a funded trader? ›

Access to Capital

One of the primary benefits of funded trading programs is access to a large amount of capital. As an individual, you may not have enough funds to invest in trading. Also, it's risky to put up your own money. A few bad trades, and you could lose it all.

Is prop trading profitable? ›

One of the benefits of proprietary trading is increased profits. Unlike when acting as a broker and earning commissions, the firm enjoys 100% of the profits from prop trading. As a proprietary trader, the bank enjoys maximum benefits from the trade.

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