Prop firms

What a prop firm is

"Prop" is short for proprietary, which means "its own." A prop firm lets traders trade with the firm's money instead of their own, and the two share the profits.

There are two kinds:

• Traditional prop firms hire traders, a bit like employees, usually after interviews and training. They're hard to get into.
• Online funded account firms are what most people mean today. You pay a fee, pass a trading test, and get an account to trade. Anyone old enough to sign up (18 in most places) can try.

This lesson is about the online kind. We're not naming or recommending any firm. The rules below are common, but every firm is different, and rules change.

Step 1: the evaluation

You pay a fee, often tens or hundreds of dollars, and take an evaluation, sometimes called a challenge. Here's an example with a pretend $50,000 account:

• Profit target: make $3,000 to pass.
• Daily loss limit: never lose more than $1,000 in a single day.
• Max drawdown: never let the account fall $2,500 below its limit line.
• Some firms add more rules, like a minimum number of trading days, or no single day can be most of your profit.

Break any rule even once and you fail. To try again, you usually pay again.

The trailing drawdown

This rule trips up the most people, so slow down here.

A trailing drawdown is a floor under your account that moves up when your account reaches a new high. It never moves down.

• You start at $50,000. The floor is $2,500 lower: $47,500.
• You make money and reach $51,500. The floor follows you up to $49,000.
• Then you have a bad stretch and drop to $49,000. You hit the floor. Account failed, even though you were only $1,000 below where you started.

At many firms, the floor stops rising once it reaches a set level, often the starting balance. Some firms check the floor only at the end of each day. Others check it every second a trade is open, counting profits you never cashed in. Read your firm's exact rule.

Step 2: the funded account and payouts

If you pass, you get a funded account. Often this account is a simulation: you trade with pretend money, and the firm tracks your results. When you make money, you can ask for a payout, a share of the profit. Traders often keep most of it, but there are usually rules about when and how much you can take out.

The same drawdown rules still apply. Break one and the funded account is gone.

The honest truth

• Most people fail evaluations. Many firms make a big part of their money from evaluation fees, not from trading.
• Passing once doesn't mean you'll get paid. Many funded accounts are lost before the first payout.
• Firms can change their rules, refuse payouts that break their fine print, or even shut down.
• The rules (small daily limits, a trailing floor) are really just this level's risk lessons, enforced strictly. If you can't follow them in a practice account, paying a fee won't change that.

Remember

• A prop firm lets you trade its money if you pass its test, and shares the profits.
• Evaluations have a profit target, a daily loss limit and a max drawdown. Break one and you fail.
• A trailing drawdown floor follows your best balance up, never down.
• Most people fail. If you ever try as an adult, treat the fee as money you'll probably lose.