How Do Forex Prop Firms Work?
If you are interested in trying forex trading, you may have heard that prop firms are the best way to access the markets, but are not quite sure what they are all about. Here’s a look at how forex prop firms work, and what they can offer you.
What is a prop firm?
Proprietary forex trading (widely abbreviated to prop trading) involves a financial institution that uses its own funds to make trades, rather than client funds. Forex prop firms allow traders access to their capital to trade, in return for a percentage of the profits made on each trade. The most successful traders can be rewarded with up to 80 per cent of their gains.
How to get started with a forex prop firm
Prop firms offer a straightforward model that allows committed traders to progress quickly and to be rewarded for their skill and effort. This process will vary depending on which firm you use, but in most cases you will need to complete an evaluation program to prove that you have the necessary skills and knowledge to make it as a trader.
This does not mean that you already need to be a seasoned trader, so long as you understand the basic concepts of forex trading and can identify good opportunities in the market. You’ll need to prove that you can manage market risk in accordance with the rules of the prop firm and hit a predefined target.
Two step, one step, and instant funding programs
More experienced traders who already have a honed trading strategy and tried and tested abilities can complete a one step program that involves a single test. Two step programs involve taking a second test to prove that the trader has really understood the process and not just lucked out on the first test, and they are ideal for those new to forex trading.
During the evaluation phase, you will be trading with a demo account and any profit and losses that you make will be theoretical.
The most experienced and confident traders may be able to skip the evaluation phase altogether and jump straight in with an instant funding program. You’ll still need to follow the account rules and manage risk in accordance with the prop firm’s risk tolerance plan.
When you pass the evaluation you will be offered a live funded account. This will usually involve paying a fee or monthly subscription that may be used as collateral for your trades, so you need to consider how much of your own money you are willing to invest and what your attitude to risk is. If you hit your targets, some prop firms will refund your fee.
Tailored trading plans
Some prop firms offer a scaling plan that can be tailored according to your trading style and skill level. If you hit your evaluation targets, you will be able to trade with larger amounts of funds and may be able to keep a higher percentage of the profits.
Funded accounts typically start at around $10k, and it’s possible to scale up to $100k + with leverage of up to 50:1 and up to 80 per cent profit share. For the talented trader, this is an opportunity to make serious amounts of money while risking very little of their own capital.
What are the advantages of a forex prop trading firm?
For many people, the main advantage of a prop firm is that even if you don’t have a large amount of capital of your own to invest, you can trade with substantial amounts of the prop firm’s capital (known as leverage). This enables you to trade with larger position sizes with the potential to make big profits, without risking your own savings in the process.
Trading with a prop firm is also a great opportunity to advance your skills as a trader. You will have instant access to industry leading technology: all you need is a mobile, laptop, tablet, or desktop computer. The forex markets operate almost 24/7, so as long as you have an internet connection, you can trade from anywhere in the world at any time.
Of course, you’ll need to operate within the rules of the game, but you’ll have room to grow, and you’ll also be part of a supportive community with access to advanced trading tools, educational resources, and guidance and mentorship.