What is a prop firm? - PropTrading.online (2024)

A proprietary trading firm is a company who provides their capital to individuals to trade with in return for a share of the profits. Typically this was done in trading rooms in wall street and London etc. Over the past 5 to 10 years many new prop firms have been opening to operate solely online.

These relatively new companies have a wide range of options, capital allocation and rules for traders, so its important to understand how each company expects you to operate with their money.

What are Prop Firm Funding Models?

Prop firms typically have a large amount of risk when they provide capital to the trader. Therefor its important to these companies that the traders who are going to use their capital are competent, profitable and understand good risk management. These online prop firms tend to do this by way of an evaluation or challenge. These evaluations come in many shapes but I will outline the main ones below.

2 Phase Challenge Model

This is the most common model you are likely to see when searching for an online prop firm. After paying some kind of enrollment fee, the trader is provided with a demo account in which to trade. The trader should treat this as real money and demonstrate their ability. The prop firm will monitor this account and ensure all their rules are being followed such as:

• Maximum drawdown – The balance or equity of the account should not go below a certain level, for example 10%.
• Daily drawdown – The balance or equity of the account should not go below a certain level during the trading day, for example 4%
• Minimum trading days – The minimum number of trades a trader should make trades, this shows the trader has consistency and not just a one hit wonder
• Max trading days – The maximum number of day allowed to complete the challenge
• Profit target – The amount of profit needed to complete that phase of the challenge, For example 10%
• EA/Copier – Some prop firms do not allow expert advisers/bots or copy trading.
• News Trading – Some firms do not allow you to trade close to major news events such as the non farm payroll.
• Restrictions on Strategies – Some prop firms do not allow certain strategies such as martingale or hedging.

After the trader has completed their first phase they are given a new demo account, generally with slightly relaxed rules. The goal of this account is to prove your consistency and didn’t “fluke” the initial phase. After successfully completing this phase, the trader will be given live funds and will start receiving their share of the profits.

Some Examples of prop firms which use the 2 phase model are:

1 Phase Model

The 1 Phase model is much like the 2 phase model, however the trader only has to complete a single phase before being given live funds. This allows the trader to begin to earn real money faster. Some examples of 1 phase models are:

Instant Funding Model

This model generally costs more than the challenge models, and usually provides less capital, however it gives the trader access to live funds immediately. Many prop firms have fast scaling up plans to increase the capital available to the trader as they demonstrate their skills.

Some examples of live funding accounts are: