What is prop firm? What are prop firms?

A proprietary trading firm (prop firm) is a financial institution that provides capital to individual traders, allowing them to trade various financial markets like forex, stocks, and commodities using the firm's funds. Instead of traders risking their own capital, the firm backs them in exchange for a share of the profits, typically around 70%-90%.

Traders must pass an evaluation or challenge, often a simulated trading phase, to prove their skills. If successful, they receive a funded account with set risk parameters. Prop firms benefit from traders' success through profit splits and reduced risk exposure.

Types of Prop Firms:

1. Traditional Prop Firms: Traders work in-house, managing significant capital with strict oversight.

2. Online Prop Firms: These firms have grown popular, offering remote trading opportunities. Traders sign up, complete a challenge, and once funded, trade from anywhere. Examples include FTMO, E8 Funding, and Rize Capital.

   
   

How Prop Firms Operate:

• Challenges and Evaluations: Most prop firms require traders to meet specific performance criteria, such as reaching a certain profit target while respecting drawdown limits (maximum loss tolerated).

• Profit Splits: Once funded, traders earn a percentage of the profits generated, while the firm takes a cut for providing the capital.

• Risk Management: Prop firms often impose risk management rules to protect their funds, like position sizing, max loss limits, or daily drawdowns.

  
  

Benefits for Traders:

• Leverage: Traders can access large capital without risking their own money.

• Low Entry Costs: Some firms charge only a small upfront fee for challenges or evaluations.

• Profit Potential: Successful traders can scale quickly, earning payouts from the firm without risking personal capital.

  
  

Common Prop Firm Models:

• Single-Phase Models: Require only one challenge to pass for funding.

• Two-Phase Models: Involve an initial evaluation followed by a verification phase.

  
  

Prop firms have become a popular choice for aspiring traders looking to scale up their operations and gain access to substantial capital while minimizing personal financial risk.