What is Prop Trading? A Complete Guide
Understand proprietary trading, how prop firms operate, and what opportunities exist for independent traders looking to access funded capital.
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Defining Proprietary Trading
Proprietary trading, often called "prop trading," refers to a financial firm trading stocks, bonds, currencies, commodities, derivatives, or other financial instruments using its own capital rather than client funds. The firm takes on the risk and retains the profits (or absorbs the losses) from these trades.
In the modern context, the term has expanded to include firms that provide capital to independent traders through evaluation-based programs. These "funded trader" models have democratized access to institutional-level capital for retail traders worldwide.
Key Takeaway
Prop trading firms provide capital to skilled traders, allowing them to trade larger positions than they could with their own funds. The firm and trader typically share profits according to predetermined agreements.
How Prop Trading Works
Most modern prop trading firms operate through a structured process designed to identify skilled traders while managing risk. Here is the typical flow:
- 1. Evaluation Phase: Traders demonstrate their skills on a simulated or live account, following specific rules around profit targets, daily loss limits, and maximum drawdown.
- 2. Verification (Optional): Some firms require a second evaluation phase with adjusted targets to confirm consistency.
- 3. Funded Account: After passing evaluations, traders receive a funded account and begin trading with the firm's capital.
- 4. Profit Sharing: Profits are split between the trader and the firm, typically ranging from 70% to 90% in favor of the trader.
Types of Prop Trading Firms
The prop trading landscape includes several distinct business models:
Traditional Prop Firms
Institutional firms like Jane Street or Citadel that hire traders as employees. These require significant experience and often an advanced degree.
Remote Funded Trader Programs
The most common model for retail traders. Firms like Profunded offer evaluation-based programs where traders pay a fee, pass a challenge, and receive funded capital.
Instant Funding Firms
Some firms skip the evaluation entirely, providing immediate access to capital for a higher upfront fee or lower profit split.
Benefits for Traders
- Access to significantly more capital than personal accounts allow
- Limited personal financial risk (only the evaluation fee is at stake)
- Professional-grade trading platforms and tools
- Structured risk management frameworks
- Ability to scale up funded account sizes over time
- No desk fees or overhead costs
Risks to Consider
While funded trading offers significant opportunities, it is important to be aware of the risks involved:
- Evaluation fees are non-refundable if you fail the challenge
- Strict risk rules can lead to account termination from a single bad day
- Profit withdrawals may have minimum thresholds or waiting periods
- Not all firms are equally reputable or financially stable
- Trading with someone else's capital can add psychological pressure
Important Notice
Trading involves substantial risk of loss. Never risk money you cannot afford to lose, and be cautious of firms that make unrealistic promises about earnings potential.
Getting Started
If you are considering funded trading, here are the recommended steps:
- 1. Develop your strategy: Practice on demo accounts until you have a consistent, rule-based approach.
- 2. Research firms thoroughly: Compare evaluation rules, profit splits, fees, and reputation across multiple firms.
- 3. Start with a smaller account: Begin with a lower-tier evaluation to minimize risk while you learn the process.
- 4. Read reviews: Check independent review sites and trader communities for honest feedback.
Disclaimer
This content is for educational purposes only and does not constitute financial advice. Trading involves substantial risk of loss. Always do your own research and consider consulting a qualified financial advisor.