Prop firms are companies that provide a large trading account to consistently profitable traders. Prop firms offer funding from $10,000 all the way up to $1,000,000 in some cases.
This sounds too good to be true, and you must be wondering: is prop trading just a scam? Or is there such a thing as a legit prop firm?
In this post, we’ll take a deep dive into the world of prop firms and see whether they’re legit, how to get a trading account with them, and how to avoid scams.
Are prop firms scams?
Most prop firms are legimitate businesses and pay out their profitable traders. Unfortunately, there are bad actors in every industry. Since there’s very little regulation around this type of prop firm, anyone anywhere can start their own prop firm and start accepting money for trading challenges.
If you stick to the more well-known names in the industry like FTMO, My Forex Funds, and the like, you’ll be safe. Thousands of prop traders have a trading account with these firms and reviews show that they’re mostly satisfied with the company.
The term “prop firm” has gotten a bad rap in recent years thanks to proprietary trading desks at big bangs nearly ruining the global financial system!
Forex prop firms(and futures prop firms too) are companies that provide a substantial-size trading account to traders who demonstrate that they are profitable.
This usually starts with a challenge on a demo account where the trader has to make a certain percentage return. If the trader is able to make that much money, they get a funded prop trading account and a profit split going forward.
Prop firm challenges are designed to be difficult
Does this sound too good to be true? That you just have to pass a trading challenge and you can get access to $50,000, $100,000, or even $500,000 of trading capital?
It kind of is too good to be true: passing the challenge is very difficult, and the conditions in most challenges are designed to toy with your trading psychology.
Every prop firm has its own specific set of rules regarding what you can and can’t do when trading, but there are two major rules which are the downfall of most traders: the daily drawdown limit and the maximum drawdown limit.
The daily drawdown is how much your account can go in the negative in a single day(balance OR equity) before you are disqualified.
The maximum drawdown limit is how much your account can go in the negative overall before you are disqualified.
Because you have to reach a large profit target in a short amount of time, you’ll often be tempted to open a lot of trades so you can hit the profit target in the given time.
However, the one thing that professional traders know about Forex is that the more trades you take, the more likely you are to lose money!
Once you start going into a drawdown, it’s very hard to get out of it unless you have very strong discipline and self-control.
Other trading rules can also throw you off, like restrictions regarding what instruments you can trade, news trading, holding trades over the weekend, and the like.
After you earn your prop trading account, another difficulty is to keep the account. The maximum drawdown will always be in place, so even though you may have a $50,000 account to trade with, you really only have $5,000 to lose before your account.
Can you make money with a prop firm?
Once you’re funded with a prop firm, you can actually make pretty good money as long as you control your impulses.
My Forex Funds released some really fascinated data about their traders, and one of the key takeaways was that their most successful traders were those who stopped trading for the month after they hit their profit target of 4-6% for the month.
As far as investments go, 4-6% in a single month is fantastic. Compare that to other investment options like real estate, which make 6-7% in a single year!
So if you’re capable of doing 5% in a month, these are the kinds of numbers you can potentially see:
- $2,500 on a $50,000 account
- $5,000 on a $100,000 account
- $10,000 on a $200,000 account
As you can see, these are pretty decent numbers and depending on where you live, this can be a full-time income and much more.
Prop firms will often post videos and marketing materials of traders who received massive payouts upwards of $50,000 in a single month.
The reality is that a prop trader who makes such a large amount in a single month is not going to be sustainable in his/her trading strategy.
In fact, the statistics released by My Forex Funds showed that when a prop trader received a massive payout in one month, they were very likely to lose the account in the next month thanks to excessive risk!
However, like all investments, prop trading will have good months and bad months.
The key is to know when to stop trading and walk away from the computer.
How do prop firms make money?
One of the reasons prop firms get a bad rap is because they’re often accused of being Ponzi schemes. They take money from people who fail challenges, and pay that money out to people who trade profitably.
This is true to a certain extent. Many prop firms explicitly state that even their “live” traders trade on demo accounts, and they have a corpus fund which algorithmically copies trades from their best traders.
There’s very little public data about their corpus, so it’s difficult to know how much these prop trading firms are actually trading themselves.
I’m sure the established firms like FTMO probably have their own active trading desk through which they themselves place trades in the market.
Still, there’s little surprise that most prop firms are indeed taking money from failed challenges and paying it out to profitable traders.
How to spot if a prop firm is a bad actor
Not every prop firm will be fully a legitimate prop firm, so what kind of warning signs should you look out for?
No Trustpilot presence
Most prop trading firms have some number of reviews on sites like TrustPilot. Indeed, you’ll see that any prop firms worth their salt will have a prominent TrustPilot badge displayed for everyone to see.
You should also make sure that the TrustPilot link is actually clickable and takes you to real reviews.
Read some of the more recent reviews and see what the pros and cons are. Every prop trading firm will have a few negative reviews from disgruntled traders, but as long as the majority are happy traders, then it’s a good sign.
One of the biggest turn-offs that jump out at you is a poorly designed or poorly presented website. If the prop trading firm has a website rife with spelling mistakes and careless presentation, you’ll want to think twice before turning over your hard-earned money to them.
If a company is purportedly managing millions of dollars in trading capital, you’d think they would at least invest in a good writer for their website copy.
Minimal online presence
A good prop trading firm will have a robust online presence, not just a website.
At the very least, you should expect a few of the following:
- A Telegram group
- A YouTube channel
- A Facebook account
- An Instagram account
- An email list
Stay away from a firm that does not have any of the above.
Unresponsive customer service
When going through the TrustPilot reviews, pay close attention to what people say about the prop firm’s customer service.
If there are many complaints about customer service taking a long time to reply or generally being unresponsive, that’s a big red flag.
When it comes to money matters, you need to go with a prop firm that will reply to you in a reasonable amount of time!
Sounding too good to be true
Prop firm challenges are designed to be difficult. If you come across a challenge that seems too easy, then here’s some news for you: there’s something fishy going on!
While every prop trading firm will try to differentiate itself from the competition in some way, shape, or form, there’s a general pattern that nearly all the firms follow.
For example, profit targets range from 5%-10%, and this is usually followed by a verification phase.
The drawdown rules are also quite similar and range from around 5% for the daily drawdown and 10% for the maximum drawdown.
Firms that offer direct funding usually offer it for a significantly higher cost, since here, you’re directly trading the firm’s capital without any proof that you are good at making money.
If you come across a prop firm that deviates too much from these norms, then it’s a sign that something could be fishy.
How to use prop trading firms the right way
As a prop trader, you know that it’s a bad idea to place all the risk in a single basket. The best plan of action for a prop trader is to get funded with one company, then slowly work on getting funded with other firms to diversify.
So let’s say your target funding is $1,000,000.
To achieve this, you can get a $200,000 funded account with FTMO, then once you’ve made your first successful withdrawal, work on getting a second account with My Forex Funds, and a third account with The Funded Trader Program.
By this point, you’re already at $600,000, and you can either do a fourth challenge, or work on scaling up to eventually hit the $1,000,000 mark.
The advantage of doing this is that if one prop firm goes bust, you still have funding with the other firms.
Also, you should consider trading your own money: put some of your withdrawals into your personal trading account and copy trades from the prop firm(provided they allow it) into your personal account so that account can also slowly start to grow.
Where does prop trading come from?
Prop trading initially started at banks where they set up internal trading desks to trade their own capital instead of their clients’ capital.
The prop firms that we are concerned with are much smaller in size, and have a very different business model compared to the trading desks at banks.
Are prop firms illegal?
After the 2008 financial crisis, proprietary trading desks were banned in the United States through a bit of regulation called the Volcker rule. This essentially prevented banks from trading their own capital instead of their clients’ capital.
In the 2008 crisis, many of the big banks on Wall St took excessive risk and nearly blew up the global financial markets in the process.
The Volcker rule was meant to prevent this from happening.
If you dig a little deeper, you’ll see that most prop firms are actually headquartered outside of the United States!
Conclusion: are prop firms legit?
At first glance, prop firms seem like they’re all a scam: there’s no risk capital on your part aside from the challenge fee, and you’re allowed to lose up to 10% of the firm’s capital without being held responsible for it!
While there certainly are shady prop trading firms out there, reputed prop firms are many and they’re a great way for a professional trader to make more money than they could with their own account.