What is a Prop Firm? Insight and Comprehensive Review
Discover the fascinating world of Prop Firms, where strategy, skill, and financial innovation converge.
Prop Firms: How Do They Work?
Are you curious about Prop Firms and looking for clear answers? You’re in the right place. Prop Firms, or proprietary trading firms, represent an exciting opportunity for traders, whether seasoned or novice. Essentially, these companies provide traders with substantial capital to operate in the stock markets – be it stocks, commodities, futures, derivatives, or currencies.
This model gives you the flexibility to choose from a wide range of assets, allowing you to diversify your trading strategies according to your preferences and skills. But before diving into this world, it’s crucial to understand the nuances and underlying mechanisms of a Prop Firm. Let’s go, let’s explore this dynamic world together and discover how you can benefit from it.
Prop Firm: Definition of the Business Model
What is a Prop Firm?
The Unique Business Model of Prop Firms
What's special about Prop Firms is their business model. They use their own money, which gives them a freedom not found in classic trading firms. This means more flexibility and sometimes a bolder approach to trading. For you, as a trader, this opens a world of opportunities.
Simulated Accounts: Your Training Ground
Prop Firms offer you simulated accounts, or 'demo accounts.' It's like a playground where you can engage in trading while significantly minimizing financial risks. You use play money to test your strategies and prove your portfolio management skills. It's your chance to shine without risking your own money.
Remuneration and Professional Opportunities
After proving your talent through evaluations, you move on to performance accounts. The principle is to be paid based on your performance. It's a system that aligns your interests with those of the Prop Firm, creating a motivating environment. And that's not all: working with a Prop Firm also opens doors for advancing in your trading career.
Prop Firm: Operation and Steps to Follow
Step 1: Analyzing the Prop Firm Market
Research Phase
Before committing, it's essential to take the necessary time to thoroughly understand the different business models of Prop Firms. This means studying the various offers available on the market, taking into account Prop Firms specialized in CFDs, futures, and other financial products. Such research will give you an overview of the options and opportunities offered by these different firms.
Comparison of Rules and Accounts
This step requires a careful analysis of the specific rules of each Prop Firm and the types of accounts they offer. This approach is crucial to give you a clear idea of each firm's expectations, their trading conditions, and how they can align with your own needs and trading style. A good understanding of these elements will help you identify the Prop Firm most suited to your career goals in trading.
Step 2: Registration and Access to the Evaluation Account
Startup Process
Registration to the Program
You start by registering with the Prop Firm of your choice. This step is done online, via the firm's website. The process may include providing your personal information and familiarizing yourself with the firm's terms and conditions.
Getting Access
Following your registration, the Prop Firm will provide you with the necessary credentials to access an evaluation account. This step marks the beginning of your adventure in the world of trading with the firm.
Objective of the Evaluation Account
Fictitious Capital for Trading
On this account, you will have access to fictitious capital, allowing you to trade in a risk-free financial environment.
Test and Demonstration of Skills
The purpose of this account is to test and prove your trading skills. You will be faced with a specific goal and a maximum drawdown not to exceed to maintain your account.
Evaluation of Strategies
This is an opportunity to demonstrate to the Prop Firm that you have the skills and strategy necessary to effectively manage a portfolio.
Step 3: Prop Firm Evaluation Test
Intensive Training:
- Learning the Rules: During this phase, you will deeply familiarize yourself with the specific rules of the Prop Firm. It's essential to understand and adhere to them to be successful.
- Risk Management: You will also learn to effectively manage risks, a key skill in the world of trading.
- Market Analysis: A significant part of your training will be devoted to market analysis, allowing you to develop a keen understanding of market dynamics.
Evaluation Criteria:
- Trading Performance: Your performance on the evaluation account will be carefully examined. This includes not only the profits made but also your ability to minimize losses.
- Compliance with Rules: Strict adherence to the trading rules of the Prop Firm is crucial. Your adherence to these rules will be a key factor in assessing your skills.
- Goals and Drawdown: It's important to meet set objectives and stay within the allowed drawdown limits to demonstrate your ability to trade responsibly and effectively.
Step 4: Transition to the Funded Account
Access to the Funded Account:
- Crucial Transition: After passing the evaluation, you reach a major milestone by accessing a funded account with various names depending on the prop firm. For example, it's called a Performance Account at Apex trader Funding or a Master Account at Bulenox. This is where trading gets serious, as you will now operate with real money.
- Validation of Your Skills: This transition is a recognition of your skills and your ability to apply what you've learned during the evaluation phase.
Rules and Objectives:
- Maintaining Strict Rules: Even with a performance account, the strict rules of the Prop Firm remain in effect. Adhering to these rules is essential for a consistent and disciplined approach to trading.
- Profit Optimization: The goal on this account is to optimize your profits while managing risks. This involves making wise and measured trading decisions.
- Risk Minimization: The risk management strategies you learned during the evaluation period are now put to the test. It's crucial to apply them effectively to protect your capital.
Step 5: Withdrawals at the Prop Firm
Performance-Based Remuneration:
Once on the performance account, your remuneration will be directly linked to your trading results. The higher your performance, the larger your share of the profit.
Commission Structure:
Prop Firms generally offer a transparent commission structure that clearly specifies how and when you will be paid. For example, some firms offer a profit split of 50/50, 80/20, or even 90/10. Normally, this was one of the factors that guided your choice of Prop Firm during Step 1.
Performance Measurement:
Your performance will be assessed considering not only your gains but also your risk management and adherence to trading rules. Each Prop Firm applies its own consistency rule.
Payment Periodicity:
Payment cycles in Prop Firms are often established on a monthly basis, during which your gains are calculated and commissions distributed. It's important to familiarize yourself with the specific withdrawal procedures of each Prop Firm.
My Experience with Prop Firms
Before starting, I explored and tested various prop firm trading sites. I found that the application and testing process was quite similar across each one. Whether you choose Apex Trader Funding, Bulenox, or TickTick Trader, the process remains the same, although the rules vary from one prop firm to another. After passing the tests, I entered into a contract with a Performance Account. To trade on this account, initially, a monthly fee covering maintenance costs was required. Today, some firms offer the option to pay activation fees in one lump sum. This represents an excellent opportunity to start without initial capital, aside from the cost of evaluation and monthly fees or a one-time payment for activation, once qualified.
In summary, you pay to apply for a trader position. You first take a test, pass it, and then get funded. Psychologically, it’s a challenge: you invest with the risk of getting nothing in return. While some hesitate even to send out resumes, here, you must be ready to invest. The funding programs are relatively affordable compared to the capital offered. All you need to pay is for the test, including a package to be operational in the markets – being operational does not necessarily mean being profitable. Once the evaluation agreements are accepted, you can work towards achieving your goals.
And then, you are faced with a set of strict rules, so much so that only 7% of candidates pass these tests. This indicates the rigor and difficulty of these evaluations, and only a small proportion of candidates access funded accounts. Among these rules, you will find the Trailing Drawdown, the Daily Drawdown, as well as a minimum of mandatory monthly trading days, among others. For more details on the specific rules of each prop firm, I invite you to consult the dedicated articles in the category:
⇒ Different Financing Programs
These rules are demanding, especially in the current economic climate, which makes trading challenging. Every trader must sometimes accept that their monthly goals are not met. The goal of earning 10% of the initial capital in the month is ambitious but achievable.
So, what does the contract with a Prop Firm look like? We will explore this in the next chapter.
Contract of a Prop Firm Trader: How Does It Work?
When you successfully pass your evaluation with a Prop Firm, you typically sign a performance contract. This contract stipulates that you will be remunerated based on the performance you achieve on the firm’s simulated accounts. It’s important to note that, in this context, you’re not operating directly in the financial markets like a market operator with an assigned portfolio. Instead, you act as a service provider, implementing trading strategies. If your strategies are effective, the Prop Firm might use them on its own accounts. Remember that trading assets on behalf of others without authorization from the AMF (Financial Markets Authority) is illegal. However, in the context of a performance-based contract with a Prop Firm, this rule does not apply.
What Status Should a Prop Trader Take?
I am neither an accountant nor a tax lawyer, so I can’t provide specific advice on legal or tax obligations. However, it is crucial to understand that the type of legal structure you choose to operate under (e.g., Sole Proprietorship, SASU, SARL, etc.) will affect your tax liabilities and responsibilities towards Urssaf. I strongly recommend consulting an expert for advice tailored to your situation.
In summary, as a prop trader, you are engaged by Prop Firms to provide a service. It is this aspect of service provision that defines your role and responsibilities.
Let’s Now Move to the Positive and Negative Sides of This Activity.
What are the Advantages and Disadvantages of Prop Firms?
Advantages of Trading with Prop Firms
✔ Access to Significant Trading Funds
A key element is the access to significant trading funds, allowing traders to handle large volumes without risking their own capital.
✔ Losses Limited to the Company's Capital
Once the tests are passed, losses only affect the company’s capital, thus offering financial security to traders.
✔ Accessible to Small Capitals
Prop Firms are particularly advantageous for those with small capitals, as they allow trading with much higher amounts.
✔ Challenge Refunded in Case of Success
It encourages you to develop sustainable and cautious trading approaches, thinking beyond immediate gains.
✔ Access to Professional Tools and Platforms
As a trader within a prop firm, you benefit from access to professional trading tools and platforms without having to invest thousands of euros. Platforms like NinjaTrader, Jigsaw Trading, or Prorealtime are often included in the monthly fees.
Disadvantages of Trading with a Prop Firm
✘ Paid Skill Tests
A point to highlight is the need to pass paid tests (challenges), which represents an initial investment.
✘ Sometimes Unfavorable Profit Sharing
Profit sharing can be disadvantageous depending on the commission structure of the Prop Firm.
✘ Existence of Dishonest Companies
Another downside to consider is the presence of some dishonest companies in the industry.
✘ Very Restrictive Conditions
The trading rules and conditions can be extremely restrictive in some Prop Firms, limiting the trader’s flexibility.
✘ Lack of Regulation
The absence of regulation in this sector can be a problem, as there is no guarantee in case of disputes.
What is the Business Model of a Prop Firm?
It is important for you to understand that passing a test and being profitable for a month does not mean you will consistently perform in the long term. It is entirely possible that you might lose your profits the following month and have to pay again to continue trading. This is how these Prop Firms make money, by capitalizing on the repetition of tests and the associated fees.
In summary, their business model largely relies on the repeated fees from evaluation tests that traders like you must pay.
Conclusion on Trading with a Prop Firm
Prop Firms offer excellent opportunities. They impose strict and binding rules, and you’ll quickly realize how easy it is to lose control and « burn » an account. Honestly, it’s better to lose the cost of an evaluation or a monthly fee rather than the total value of the capital of a Performance Account. Moreover, I believe there is no better training to work on your psychology and adopt good habits in the face of markets. Unlike demo mode, with Prop Firms, there’s real stakes and a challenge, which greatly influences your behavior.
If you were wondering, upon arriving at this article, whether to continue trading on a demo account and then start with your savings in real or opt for Prop Firms, I hope to have helped you choose the best option for you. If you are ready to take the step with Prop Firms, find all the best promotions currently on this page:
FAQ on Prop Firms: Key Questions Answered for Traders
What exactly is a Prop Firm?
A Prop Firm, or proprietary trading firm, is a company that allows you to use its capital to trade in the financial markets. These firms provide you with funds and share with you the profits generated.
What are the main advantages of trading with a Prop Firm?
The advantages include access to significant trading funds, limited risks, flexibility in trading hours, reduced trading costs, and access to professional tools and platforms. In short, everything you need to boost your trading career.
Prop Firm Trading: Challenges and Disadvantages
The challenges include adhering to strict trading rules, managing pressure due to high targets, and sometimes facing a limited choice of assets to trade. Not always easy, but it's worth it.
How does the application process work in a Prop Firm?
To join a Prop Firm, you usually need to register, pass skill tests, and if successful, sign a performance contract to trade with the firm's real money.
What kind of contract do you sign with a Prop Firm?
The typical contract is a performance contract. This means you are paid based on your performance on the firm's accounts. A good deal if you are confident in your strategies.
How do you choose the right Prop Firm?
Choosing the right Prop Firm requires doing your research, comparing trading rules, remuneration structures, and reading what other traders say about them. Take your time with this important decision.
Are Prop Firms suitable for beginners?
For beginners, it all depends on the Prop Firm and its program. Some are great for novices with affordable programs, while others are better suited for experienced traders.
Prop Firm vs Personal Capital: What are the Differences?
The main difference lies in the level of risk and the financial leverage available. With a Prop Firm, you have less personal risk and more leverage to trade. The trading rules and potential for gains are also different.
How Do Prop Firms Manage Risk?
To manage risk, Prop Firms use mechanisms like Trailing Drawdown and Daily Drawdown. These tools force you to maintain a consistent trading strategy to minimize your losses and protect your gains.
Can Everyone Succeed with a Prop Firm?
Succeeding with a Prop Firm requires specific skills, experience, and a lot of discipline. It's not for everyone, but if you're determined, it can be a lucrative path.
How Can I Choose the Prop Firm Best Suited to My Style?
To choose the right Prop Firm, consider the type of assets available, trading conditions, and remuneration structure. Find one that matches your style and goals.
"How to Avoid Pitfalls in Prop Firm Trading?
The pitfalls to avoid are overconfidence, not adhering to trading rules, and poor risk management. Stay focused and disciplined to avoid these mistakes.
Can I Make a Living Trading with a Prop Firm?
Making a living trading with a Prop Firm is possible, but it requires hard work and consistency. The challenges are real, but with the right strategies and solid management, you can make it your primary source of income.
