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Prop Firms 101: What To Know About Funded Forex Accounts

Prop Firms 101: What To Know About Funded Forex Accounts

Have you heard about someone who makes their living as a forex trader, and wondered how you can achieve the same goal? The answer is by working with a prop funding firm. Maybe you have heard about them, but it all seems to be shrouded in mystery. How do professional traders make enough money to sustain a full time career? Do prop firms really pay out? 

Here are the answers to these questions and more about how prop firms for forex traders work.

What is a prop firm?

First up, let’s demystify prop firms. ‘Prop’ is an abbreviation of ‘proprietary’, and in the context of prop firms, this means that the trading activities are carried out with the firm’s own money, rather than client accounts. Prop trading is common practice on the forex, stocks, and commodities markets. 

The prop firm provides eligible traders with capital in return for a share in any profits they make. Any losses are covered by the prop firm, so the trader does not have to risk any of their own capital. If you think that this sounds too good to be true, read on for more detail about how you can set yourself up as a forex trader with minimal personal financial liability.

Forex prop firm business models

Until the dawn of the digital age, financial trading was largely inaccessible to the ordinary person and was generally carried out by employees of large banks or financial institutions. However, thanks to the rise of the internet and digital trading platforms, prop firms have developed a business model that throws the field wide open.

Having said that, it’s not just a case of signing up and letting loose. Forex prop firms are businesses that need to make money, so they want to work with traders that they can trust with funded accounts. This means that in order to be given access to capital, the majority of prop firms will require traders to pass an evaluation process.

This can either be a two-step process, involving two tests, or a one-step process with a single test at the end. The two-step process is ideal for less experienced traders, because it gives them the opportunity to build up their confidence and skills, and prove to themselves and the firm that they have what it takes to be successful.

The one-step evaluation is best for traders with some experience under their belt, but who want a warm up period that allows them to familiarize themselves with the trading interface, test out their strategy and understand the risk management rules of the prop firm. During the evaluation phase, you’ll be trading with a simulated account rather than live funds. 

Some prop firms, including FTUK, also offer instant funding programs in return for an upfront fee. You’ll be given live funding from day one, but will still have to operate within the firm’s risk management rules, daily drawdown limits, and hit your profit targets. 

This program suits the most experienced and confident traders, and you may need evidence of your track record or qualifications to demonstrate your competence. 

How do prop firms make money?

Prop firms need access to high volumes of liquidity to provide funded accounts, so naturally you want to know where this is coming from. Most firms operate with a combination of the challenge model and the profit-sharing model. When you register, you will typically be asked to pay an upfront fee to take the one or two-step challenge.

In return for the fee, you’ll have access to a trading platform, risk management tools, and training materials. It’s an opportunity to gain experience of a trading environment without the pressure of a live account, to roadtest your strategy and work on your trading mindset. If you pass the evaluation phase with FTUK, your fee will be refunded to your account.

The profit-share model usually works on a scaling plan: new traders can expect to keep 50 per cent of the profits they make provided they hit a minimum target, and as you progress through the levels, your account size and profit share will increase in stages, through 60, 70 and up to a maximum of 80 per cent. 

How do prop firm payouts work?

Prop firms may have slightly different payout structures, so it’s important to understand what these are before you sign up. In most cases, you’ll be asked to set up an account with a payment processor, such as PayPal or RiseWorks. The transaction fees may be covered by the prop firm, but check if you are unclear about this.

The default currency will usually be USD, but most prop firms including FTUK will give you the option of a crypto currency payout. The payment processing timescale is usually one to two working days. 

Most prop firms will require you to have a minimum amount of profit in your account before you can make a payout request. In the case of FTUK, this is $250 of your profit share, rather than the total funds in the account. You’ll need to pass the evaluation program before you can request a payout, and any profits you make during this period will be disregarded. 

The frequency of withdrawal requests usually starts at monthly or every two weeks, although top traders may be able to make more frequent requests. You’ll need to hit your profit targets of at least 10 per cent to continue progressing through the scaling plans. 

Can you really make a profit from forex trading?

Some people believe that forex trading is high-risk and only a tiny percentage of traders manage to make a profit. It’s true that the evaluation programs are rigorous and you’ll need a well planned trading strategy to succeed. However, many people start with a very limited amount of experience and are able to earn consistent profits within six months.

Remember that prop firms are businesses that need profitable traders to survive, and it’s in their interest to encourage their traders to thrive and develop their skills over the long term. 

They also need traders they can trust to handle large sums of money without taking huge risks, which is why the evaluation programs are there: after all, you wouldn’t let drivers loose on the road without a licence, and prop firms don’t want to let unskilled or undisciplined traders loose on the markets with their money. 

How do you choose the right prop firm for you?

Choosing the right prop firm will play a big factor in whether you make it as a trader or become disillusioned with the whole idea. Not all firms operate on the same business model, so find out what’s involved, including up front fees and profit share arrangements. 

Some firms may require you to put up a certain amount of your own capital as a deposit or pay a monthly fee to be given access to an account, so check if the account is fully funded by the prop firm. The firm should be transparent about their funding model with no hidden surprises, so do your research and ask if there are any aspects you are uncertain about. 

If you already have some experience as a trader, check out the firm’s trading rules, drawdown limits and profit targets: are they compatible with your accustomed trading style? Some firms have prescribed trading strategies and strict risk management protocols, while others offer more scope for individualism. 

Another important aspect to consider is the scaling opportunities: look for a prop firm that rewards consistent performance with a larger account size and profit share. For example, at FTUK, when you first pass the evaluation program, you’ll have access to an account of between $10,000 and $10,000 with 10:1 leverage and a 50 per cent profit share.

As you progress through the levels, you’ll be able to trade with a maximum account size of $6,400,000 with 50:1 leverage and an 80 per cent profit share. 

Is a prop firm the right choice for you?

Prop firms offer excellent prospects for traders who have some knowledge of forex trading and understand the importance of a solid trading strategy and risk management plan. They will enable you to trade with far higher amounts of capital than you could as a solo trader, with no personal financial risk and the possibility of making good profits.

You will also have access to their education and training resources and an online community to help you develop your trading skills and knowledge. The most successful traders will be rewarded for a consistent performance with larger accounts and bigger profit shares. 

However, you’ll need to have the discipline to trade regularly and within the firm’s rules and guidelines, and the emotional resilience to make objective decisions and bounce back from setbacks. If you’ve got what it takes and choose a reputable prop firm, the rewards can be considerable.