A prop firm account is a trading account provided by a proprietary trading firm where traders manage the firm’s capital rather than their own. The firm allocates funds to the trader after they pass an evaluation process, which assesses their ability to generate profits while managing risk effectively. Here’s a closer look at how a prop firm account operates:
1. The Evaluation Phase
Before gaining access to a funded account, most prop firms require traders to complete an evaluation phase or a challenge. This stage assesses whether the trader has the necessary skills to manage the firm’s capital while adhering to strict risk management rules. The evaluation often involves hitting a profit target, typically ranging from 8% to 10%, while avoiding exceeding a certain drawdown limit (such as 5% daily or 10% overall loss).
Some firms offer a single-phase evaluation, while others have a two-phase model, where the second phase is a verification of the trader's consistency and risk management. For example, firms like FTMO and E8 Funding have a two-phase challenge, while firms like Rize Capital use a simpler, one-phase model.
2. Funded Accounts
Once traders pass the evaluation, they receive a funded account, which allows them to trade with the firm’s capital. The size of the account depends on the firm and the level of evaluation passed. Funded accounts can range from $10,000 to $500,000 or more.
Traders use this capital to trade in real financial markets, including forex, indices, commodities, stocks, and sometimes cryptocurrencies. The key difference from personal accounts is that traders do not risk their own money. Instead, they use the firm’s funds and must follow certain guidelines and risk management protocols to avoid being disqualified.
3. Trading Rules and Risk Management
Even in a funded account, prop firms set strict risk management rules to protect their capital. These can include:
Maximum daily drawdown: Traders cannot lose more than a certain percentage of the account value in a single day.
Overall drawdown limit: This caps the total loss a trader can incur before their account is deactivated.
Position sizing limits: Rules about the size of trades relative to the account balance, designed to minimize the risk of large losses on single trades.
In addition, some prop firms may have specific rules regarding news trading (trading around economic reports) or holding positions overnight, though some firms like Rize Capital are more flexible in this regard, allowing traders more freedom in their strategies.
4. Profit Splits
One of the primary benefits of working with a prop firm is the profit split model. After generating profits in a funded account, the trader receives a percentage of those profits, while the firm keeps the rest. The profit split varies by firm but typically ranges from 70%-90% in favor of the trader.
For example, if a trader generates $10,000 in profits, and the firm offers an 80/20 profit split, the trader keeps $8,000 while the firm retains $2,000. Some firms, like TopStep, allow traders to keep 100% of the first few thousand dollars of profit before applying a split.
5. Scaling the Account
Many prop firms offer a scaling plan, which allows traders to increase their account size based on consistent performance. As traders continue to generate profits without violating risk management rules, they may qualify for larger accounts, sometimes growing from $50,000 to $200,000 or more.
Scaling typically occurs in increments, and traders must meet certain profit milestones while maintaining low drawdowns. This helps both the trader and the firm increase earnings potential over time.
6. Payouts
Most prop firms offer regular payouts, typically on a bi-weekly or monthly basis. Some firms, like Rize Capital, provide payouts every Friday. Traders can request withdrawals of their share of the profits according to the firm’s payout schedule. Firms process these payouts through various methods, including bank transfers, e-wallets, and sometimes cryptocurrency.
7. Costs and Fees
Though traders don’t risk their own capital, there are often upfront costs associated with joining a prop firm. The most common fee is for the evaluation phase, where traders pay to take the challenge. This fee varies depending on the account size and can range from $100 to $500 or more. If the trader passes, this fee is usually viewed as an investment, considering the much larger capital allocation they gain access to.
Some firms also offer refundable fees, meaning the trader can get their evaluation fee back after reaching a certain profit level in the funded account.
Conclusion
A prop firm account is a valuable opportunity for skilled traders who want to access large sums of capital without risking their own money. By passing an evaluation process and adhering to risk management rules, traders can unlock the firm’s capital and trade in real markets. With the right strategy, traders can earn significant profits while sharing a portion with the firm, making it an appealing model for those who want to scale up their trading efforts.
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