Proprietary trading, or prop trading, has become increasingly popular in recent years. This trading style, where prop firms provide online traders with capital in exchange for a share of the profits, has become a the go to alternative to CFD trading or traditional share investing. As the number of prop firms increases, comparison websites like Prop-Firms.com have become essential tools for retail traders to find the right firm.
These websites help traders compare key features like profit splits, evaluation processes, software, and fees, making it easier to choose a prop trading firm that suits their risk tolerance and goals. The rise of prop trading is reshaping how individuals engage with financial markets and online trading, providing opportunities for those with limited personal capital to access large funds and compete on a bigger scale.
Understanding Prop Trading: A New Opportunity for Traders
Prop trading allows traders to access capital provided by a firm rather than using their own. In return, the firm takes a percentage of the profits generated, with strict trading rules in place. This setup means that traders can focus on executing strategies without the fear of losing their own funds, while the firm benefits from successful traders who increase overall profitability.
We spoke to Justin Grossbard, an online trading industry expert, who shared his insights on why prop trading is becoming a popular option for retail traders. "Prop trading has become a go-to for retail traders wanting to scale up, mainly because, unlike traditional brokers where you're risking your own money, prop firms give you access to significant funds if you can pass their evaluation," Grossbard explains.
This trend is reflected in the growing interest among retail traders in finding the best prop trading firms that suit their style and financial goals.
How Prop Firms Work - Funding and Evaluation
Most prop trading firms follow a similar model. To access a firm’s capital, traders must pay a one off challenge fee and pass the evaluation process. This typically involves meeting specific profit targets while adhering to strict risk management rules. The evaluation ensures that only traders who can consistently manage risk and generate profits are given funded accounts. These evaluations often vary in difficulty, with some firms offering one-step evaluations while others require a two-step process, in some cases, instant funding is available.
The funding amounts vary depending on the firm and the trader’s performance during the evaluation. Prop firms might offer capital starting from $10,000, scaling up to $2 million for those who consistently meet profit targets. In addition, prop firms implement strict risk management policies, including maximum drawdown limits to protect their capital.
Key Features Prop Traders Look For
Prop trading is now a highly competitive market, with each prop firm offering unique trading challenges and features aimed at attracting the most skilled traders. These firms must provide a combination of favorable conditions, support, and risk management tools to appeal to traders who are looking to maximise profits while adhering to strict trading rules. Some of the most important features traders consider when selecting a prop firm include:
- Profit Splits: Many prop firms offer high profit splits, with traders often keeping 80% or more of their profits. Some firms even provide profit shares as high as 90% - 100%, making it an appealing option for successful traders.
- Evaluation Programs: The structure of the evaluation process is a key factor in choosing a prop firm. Some traders prefer firms with simpler one-step evaluations, while others may be more comfortable with multi-step challenges that offer larger funding amounts. For the most experienced traders, instant funding programs are offered by some prop firms like Blueberry Funded and Funded Trading Plus (FTP).
- Trading Platforms: Reliable and user friendly trading platforms are crucial. Many prop firms offer the most popular trading platforms like MetaTrader 4 (MT4), MetaTrader 5 (MT5), TradingView, and cTrader, offering traders the tools they need to analyze markets and execute trades efficiently.
- Financial Market Access: Prop firms often specialize in different financial markets. Some focus on forex trading, while others may offer access to a broader range of markets, including stocks, commodities, and cryptocurrencies. This diversity allows traders to find a firm that aligns with their preferred trading instruments.
The Appeal of Prop Trading: Low-Risk, High-Potential
One of the main reasons prop trading has gained popularity is its low-risk structure for traders. Unlike self-funded trading, where traders risk their own money, prop trading minimizes personal financial exposure. If a trader fails to meet the firm's evaluation criteria, they typically only lose the evaluation fee, rather than a significant amount of their own capital. This allows traders to experiment with different strategies and refine their skills without the financial burden associated with self-funded trading.
Justin Grossbard further explains the appeal, stating, "What makes prop trading so increasingly popular is that it lets you access large amounts of capital without putting your own funds on the line. It gives skilled and experienced traders the chance to scale up their accounts quickly without the same financial risks you’d face in traditional CFD trading."
In exchange for this low-risk structure, traders agree to split their profits with the prop firm. While the profit split reduces the total amount the trader keeps, the ability to trade with larger sums of capital often outweighs this trade-off. The possibility of earning a share of large profits, without risking personal funds, makes prop trading an attractive option for skilled traders.
The Challenges of Prop Trading
Despite its appeal, prop trading is not without its challenges. Success rates among prop traders are relatively low, with only a small percentage passing the evaluations and earning payouts. This is due to the strict risk management rules imposed by the prop companies, which can be difficult to adhere to, especially in volatile market conditions.
Moreover, prop trading requires a disciplined approach to risk management. Traders who exceed their overall or daily drawdown limits risk losing their funded accounts and failing prop challenges. This makes prop trading ideal for those who can maintain a consistent, rules-based approach to their trading strategies.
Technology’s Role in Prop Trading
Technology and software has played a critical role in the growth of prop trading. Prop firms rely on advanced trading platforms and tools to monitor traders’ performance and ensure adherence to their rules. These platforms also provide traders with cutting-edge tools for technical analysis, automation, and algorithmic trading.
Firms that offer features like Expert Advisors (EAs) allow traders to automate their strategies, taking advantage of technology to execute trades based on pre-set rules. Additionally, the rise of cloud-based trading platforms has made it easier for traders to access their accounts from anywhere, ensuring they can manage their trades efficiently.
The Future of Prop Trading
As more retail traders seek alternatives to traditional trading models, prop trading is expected to continue growing. With technological advancements, improved access to education, and a competitive market, prop trading firms are likely to expand their offerings and make it easier for traders to access capital. The demand for firms that offer flexible evaluation models, affordable fees, and access to a variety of markets will continue to shape the industry.
This article was written in cooperation with Tom White.