What is a Prop Firm and Funded Account?

Among financial traders, the term “prop firm” has been getting much attention, particularly among those who want to trade and enter the financial markets with no risk to their own capital. Whether it be stock, crypto, or even other asset classes, the prop firm model provides some really exciting opportunities. The article will break down the prop trading basics and funded account mechanics, then extend into how the prop trading firm or proprietary trading company works.

What is a Prop Firm in Trading?

A prop firm is any business that finances traders to trade on behalf of the company. The traders will be trading using the firm’s capital, instead of personal capital, and give up a certain amount of their profit to them.

How Does a Prop Trading Firm Work?

A prop trading firm works by onboarding skilled traders or investors and providing them with the capital and resources needed. The firms usually come up with a proprietary trading strategy that matches different markets such as stocks, commodities, forex, and cryptocurrencies. Traders are given either a prop firm account or funded prop account and they are expected to trade based on a set of risk parameters which the firm shall establish. The key advantage is that traders can earn a significant share of the profits, all without risking their own money.

Funded Prop Accounts and What They Offer

Probably the biggest attraction of being in a funded prop firm is the ability to trade with considerable capital. The funded accounts give rights to access a firm’s capital, therefore, to trade larger positions than they can on their own. Prop trading firms offer a number of advantages, including, but not limited to, the following:

• No personal risk: a trader does not expose his or her own money but rather company capital.
• Profit sharing: A trader keeps a huge share of the profit he or she makes, from 50% to 90%.
• Mentorship: Some firms offer resources and training to help traders develop and refine their trading strategies.

However, these come with some disadvantages:

• Profit split: While traders don’t risk their own capital, they also don’t keep all the profits. A big share usually goes to the firm.
• Pressure to perform: The traders have to meet the profit targets all the time, hence are under stress and make bad decisions.
• Loss of Account: Failure to follow the risk management rules means loss of the prop firm-funded account, hence traders might get out of a job or will face serious penalties.

Prop Firms Types

Prop firms come in all shapes and sizes, with a variety of trading styles and asset classes. The following are some common ones: 

Stock Prop Firms: These firms usually operate in equities, allowing traders to benefit from stock market price movements. In that respect, the prop firm trading strategies review the stocks in depth, utilize the short-term volatility, and execute the best trade that fits the goals of the firm.

Crypto Prop Firm: Crypto prop firms started giving traders an outlet to trade various digital assets ranging from Bitcoin, Ethereum, among other altcoins, with a continuous expansion into the crypto market. The main difference with those traditional prop firms is that crypto prop firms simply operate within this fast-moving, ever-changing environment of cryptocurrency.

Forex Prop Firms: A few prop firms specialize in forex trading, enabling traders to speculate on any pair of currencies around the world by providing them with the much-needed capital to earn significantly from small fluctuations.

But, of course, there is no rose without thorns. There are disadvantages to these varied types of prop firms:

• High entry fees and hidden costs during the evaluation process.
• Strict drawdown limits and rules that can create stress.
• Delayed rewards — gaining funding might take weeks or even months.
• Trading restrictions — limited freedom in how and when you can trade.

How to Join a Prop Trading Firm

Most prop trading firms get started by passing some sort of trading challenge. In general, such challenges test the trader’s ability, risk management, and profitability. When one passes a challenge, that means he is presented with a funded prop firm account. This normally goes like this:

1. Passing the assessment (challenge)  showing one can trade within certain risk parameters, and hitting profit targets.
2. Get a funded account: Once passed, traders get access to the firm’s capital.
3. Trade and share profits: They can trade using the firm’s capital and share the profits they make.

While this setup can be beneficial, it also has its drawbacks:

• High failure rates in trading challenges: Most of the traders are unable to pass the initial challenge because their profit expectations from their trades are unrealistic or because they cannot maintain risk perimeters imposed by the firm. 
• Challenge fees: This is the fee charged by some firms to start these challenges. If you fail, you may need to do it over and again.
• Pressure to pass: The challenge often creates a lot of pressure to meet specific targets, which could negatively affect the performance of a trader.

Some prop firms even offer services of prop firm passing to aid traders in prop challenges by providing customized support and strategies to increase their chances of success. For such services, charges may also be applied. 

Prop Trading Strategies

Successful traders of proprietary trading firms have to work out prop trading strategies. Most of these strategies are designed to take advantage of market conditions, volatility, and trend, in addition to handling risk and optimizing capital. Popular proprietary trading strategies include:

• Scalping: Small, rapid trades through which to make quick gains from the short movements in the price.
• Swing trading: Holding positions up to several days in order to capture medium-term trends.
• Trend following: Finding and surfing long-term trends in the market.

How to Choose the Best Prop Firm

A trader should consider the following when choosing a trading proprietary firm: account size, fees, and costs. Large firms may be able to provide more significant capital, while smaller firms can offer more personalized service. Some firms charge monthly fees or take a portion of the trader’s profits.

• Trading rules: The prop firm account should apply to your chosen style of trading and your preferred risk tolerance
• Support and resources: Some firms have educational support and mentorship whereas some others may not and just provide only capital.

Final Thoughts

Prop firm (or proprietary trading firm) represents an excellent avenue for good traders to be injected with the facility of capital required to trade with while it lessens financial exposure. Whether you’re interested in stocks, crypto, or other markets, prop trading firms provide a platform for traders to use their skills in exchange for a profit share. However, it’s essential to understand both the advantages and disadvantages of joining a prop firm, such as the profit split, performance pressures, and strict trading rules. If you’re ready to take your trading to the next level, joining a prop firm might be the path to unlock your full potential—but make sure you’re prepared for the challenges that come with it.

If you’re looking for a low-risk, high-reward environment to improve your trading skills, a gamified trading platform BullRush offers the perfect trading challenges. Unlike other prop firm challenges that come with the pressure of managing firm capital, BullRush provides a gamified platform to test your strategies without risking real money. With BullRushyou can practice in real market conditions without the stress of real capital at risk. Join BullRush now to compete, improve, and win, all while enjoying the trading process!