Understanding Prop Firm Payouts
Forex trading is a popular way to supplement your income, or even make your full-time career if you are good enough. Prop firms are an accessible way to start trading even if you only have a small budget, because it’s possible to trade with the firm’s funds rather than your own.
As you progress through the evaluation process and onto a live trading account, there’s the opportunity to make big profits. However, it’s important to understand the payout structure of the prop firm before you sign up, so that you’ve got a clear picture of your earning potential, and to make an informed decision about which firm will best suit your profit goals.
How do prop firms work and what are prop firm payouts?
First up, let’s take a look at the basic setup of a forex prop firm. To put it simply, these are companies that allow traders to trade with large amounts of the firm’s capital, rather than risking your own money. In return, the prop firm will take a percentage of the profits you make on each trade.
This is not a new concept, but until the rapid ascent of the internet, it was the domain of larger banks and financial institutions. Now, technology has led the way to dedicated prop firms, which have thrown open the doors to a much wider trading audience.
In fact, anyone with a digital device such as a smartphone or laptop and an internet connection can apply to an independent prop trading firm. It will usually be necessary to complete an evaluation phase first, which may involve one or two steps where you need to pass a test and meet virtual profit targets in order to progress.
However, for the most experienced and confident traders, it’s possible to find firms that offer instant forex funding, bypassing the evaluation phase and having immediate access to a live funded account. You’ll still need to trade with the firm’s risk management rules and hit certain targets if you want to progress to larger capital allowances.
What factors influence prop firm payouts?
So, as you will have grasped by now, a prop firm payout is basically the percentage of profits that you can keep after making a successful trade. The percentage split will vary according to factors such as which prop firm you use, the type of account you have, and your performance history.
Typically, traders will be able to keep up to between 50 to 80 per cent of their profits per trade. The firm may offer an increasing percentage that rewards consistent performance and meeting predetermined profit targets.
The prop firm should offer clear and transparent rules about their payout structure, so make sure that this is the case, and they are not hiding caveats in the small print. Naturally, it’s important that you have understood the payout terms fully before you sign up to avoid any confusion or frustration later on down the line.
Check points such as the required minimum profit targets needed to receive a payout; how frequently the payouts are made (typically every two weeks or once a month); what currencies are used to make the payouts; and how many working days the payouts take to process.
Why are payout structures in place?
The payout structure may seem to be a longer and more detailed process than you would like: after all, you are putting in your time and effort and you want to be rewarded for it. However, the setup is not designed to be deliberately obstructive, but rather to protect both you and the company from making unsustainable losses.
You may need to put up a certain amount of your own capital as collateral, and although this will generally be a moderate amount, you will risk losing this if you make reckless decisions and poorly planned trades.
As you will largely be trading with the firm’s capital, it’s important that you can prove your ability to manage market risk in accordance with their rules, within specified drawdown limits, and to hit your profit targets.
Scaling programs
To encourage high performance and motivation, many firms offer attractive scaling programs. These are designed to reward the most consistent and profitable traders with larger account sizes each time certain benchmarks are met.
For example, a new trader will typically start with an account size of $10k, but the size will double each time you hit your targets. Depending on which prop firm you use, the very highest performing traders can have access to a maximum account of $6,400,000 with a profit share of 80 per cent.
Larger accounts lead to higher payouts if you continue to make profitable trades. You may also be able to make more frequent withdrawals of your payouts, if you wish to use them for other investments or to cover your personal expenses. Therefore, it’s a potentially very lucrative endeavour if you are a skilled and dedicated trader.
Tips for getting the best out of prop firm payouts
It’s essential to research the terms and conditions of the prop firm carefully. As we have seen, the payout structures vary, so make sure that you use a company with a competitive system that does not make rash or unrealistic promises, but offers a clear pathway to be rewarded for consistent performance.
Assess your current trading level
You should also take into account your level of skill and trading experience. Forex trading is definitely not a get rich quick scheme, and there are really no shortcuts to making big bucks. Therefore be honest with yourself about your abilities and current level of knowledge.
The evaluation systems that most forex prop firms have in place are there for the mutual benefit of you and the company. It may be a slower process than you’d ideally wish for, but trading with a virtual account rather than live funds can help you to build up your confidence, road test your strategy, and prove to yourself as well as the company what you can do.
There are many free resources available to help you learn more about forex trading, from webinars and podcasts to videos and downloadable materials. When you sign up to a prop firm, you should also have access to a supportive community where you can ask questions and look for guidance or mentorship.
Educate yourself as much as you can about the various aspects of forex if you lack experience, such as the basics of fundamental analysis and trading economic news, and the basic concepts of technical analysis, such as how to interpret bar charts and line graphs in order to read market conditions and identify opportunities to place good trades.
Understand your trading style and risk tolerance
Some prop firms may be more geared towards certain trading styles, such as short term day trading or swing trading, or longer term position trading. Consider your trading style, which may be influenced by your temperament and natural abilities, as well as the amount of time you have available for trading.
For example, if you are comfortable with making fast decisions, have a high tolerance for risk, and the time to monitor your trades closely without interruptions and other commitments to attend to, then you may be suited to a firm that prioritises high volume trading styles.
If you prefer to have plenty of time to consider your trading decisions, and are combining your trading with a full time job or other duties, then you should consider longer term trading strategies.
The prop firm should be matched to your trading style and goals, so research their setup and ethos beforehand. This will give you the best chance of meeting the payout requirements and making larger profits.
Understand the rules
Knowing and complying with the rules of the prop firm is essential to ensure that you do not violate the terms and conditions, which could lead to payout penalties or even the termination of your account.
Forex prop firms generally have a high risk tolerance because they are using their own funds rather than managing accounts on behalf of clients, but it will still be necessary to trade within their stipulated risk parameters.
To protect your payouts, you should not exceed your daily drawdown limits or overall account limit, and comply with any other rules as stated in their terms and conditions.
Look for scaling programs
Many forex prop firms offer scaling plans, which are designed to reward the most consistent and profitable traders. This gives you the potential to significantly increase your account size, allowing you to place larger trades with the potential for bigger profits. Typically, the better you perform, the larger the percentage of your profits you can keep.
Research the profit sharing arrangements of the prop firm so you can compare the market and understand what to expect.
Aim for consistent profits
Above all, the key to being a successful forex trader and maximising your payouts is through a consistent performance with carefully managed risks. Devise a trading strategy that focuses on this, rather than aiming for high risk trades with short term strategies.