What Is a Prop Firm?
A prop firm lets you trade an account sized by the firm and pays you a share of the profits, as long as you stay inside its risk rules.
A prop firm, short for proprietary trading firm, lets you trade an account sized by the firm and pays you a share of the profits, as long as you stay inside its risk rules. For retail traders the usual route in is a paid evaluation, and many firms run their funded accounts in a simulated environment while paying real money on the results. What you put at risk is normally the evaluation fee rather than a deposit of your own.
How a prop firm works
The retail model has four stages. The details change from firm to firm, but the order is nearly always the same.
- Buy an evaluation. You pay a fee for an account of a set size, such as $50,000 or $100,000. Some firms charge once and others bill monthly until you pass.
- Pass the rules. You need to reach a profit target without breaking a daily loss limit or a maximum loss limit, and without breaching conditions such as a minimum number of trading days or a consistency rule.
- Trade the funded account. Once you pass, you receive a funded account, sometimes after paying an activation fee. The loss limits still apply, and breaking one closes the account.
- Take payouts. Profit on the funded account is split between you and the firm, and it is paid on a schedule once you meet the payout conditions.
The full mechanics of targets and limits are covered in how prop firm challenges work, and the terms used below are defined in the prop firm glossary.
A worked example
The figures below describe a made up account, not any real firm’s offer. Take a $100,000 two step evaluation that costs $500 and has these rules.
| Rule | Setting | In dollars |
|---|---|---|
| Phase 1 profit target | 8% | $8,000 |
| Phase 2 profit target | 5% | $5,000 |
| Daily loss limit | 5% of the starting balance | $5,000 in any one day |
| Maximum loss | 10%, static | The balance may never fall below $90,000 |
| Profit split once funded | 80% to the trader | $80 of every $100 of profit |
Suppose the trader passes both phases and then makes $6,000 on the funded account in the first payout cycle. At an 80% split the payout is $4,800, so after the $500 fee the trader is $4,300 ahead. Now suppose the same trader had a poor week in phase 1 and the balance fell to $90,000. The account closes at that floor, and the loss is the $500 fee, not $10,000 of personal money.
That asymmetry is the main appeal of the model. The trade off is that the rules are strict and the room for error is small. On this example account the trader has $10,000 of room in total and $5,000 in a single day, even though the account is labelled $100,000. A position sized as if the full $100,000 were available would be far too large.
Three kinds of prop firm
The name covers businesses that work in quite different ways, and it helps to know which kind you are dealing with.
Evaluation firms
These sell challenges to the public and pay traders based on results in simulated accounts. Topstep is a clear example. Its help centre describes the Trading Combine as a simulated account, describes the Express Funded Account that follows as a simulated funded account, and states that Topstep pays real money based on simulated trading results. How firms like this fund their payouts is covered in how prop firms really make money.
Broker funding schemes
Some brokers run their own funding schemes, and these can work very differently. Axi Select charges no fee and has no simulated evaluation. Traders deposit at least $500 of their own money and trade it live, and once they meet Axi’s criteria the broker copies their orders into a separate allocation account funded with its own capital. Here the trader’s own deposit is at risk from the first trade.
Traditional proprietary trading firms
These trade the firm’s own money through employed or contracted traders, often from an office. They recruit traders rather than sell evaluations to the public, so there is no challenge to buy.
Simulated or live money
At many evaluation firms the funded account is simulated. Your trades are not sent to an exchange or a liquidity provider, but the firm pays you a share of the simulated profit in real money. Some firms then move their most consistent traders to a live account. Topstep, for example, calls its final stage the Live Funded Account and describes it as real capital, with its own costs such as professional market data. The differences matter for payouts, costs and how long an account lasts, and they are set out in simulated vs live capital at prop firms.
How firms differ
- Market. Futures firms trade exchange listed contracts on platforms such as Tradovate, NinjaTrader and Rithmic, while forex and CFD firms mostly offer platforms such as MetaTrader 5. The two groups are listed separately under futures prop firms and forex and CFD prop firms, and forex vs futures prop firms compares them.
- Billing. Topstep bills its Trading Combine monthly until you pass, starting at $49 a month for a 50K account on its Standard Path. DayTraders.com lets traders pay for an evaluation once or monthly at the same price.
- Structure. Some firms use one phase, some use two, and some sell instant accounts with no evaluation. One step vs two step challenges and instant funding vs evaluation cover the trade offs.
- Profit split. DayTraders.com pays 100% of simulated profit on its Pro accounts, while The5ers Futures pays 80%.
- Fee refunds. The5ers Futures refunds the evaluation fee with the third payout, so a trader who reaches that point recovers the entry cost.
Common mistakes
- Treating the account size as spendable money. A $100,000 account with a $10,000 maximum loss gives you $10,000 of room, not $100,000.
- Reading only the headline split. Payout caps, minimum trading days, buffers and processing fees decide how much you actually receive and when.
- Assuming a prop firm is regulated like a broker. Many firms state that they provide only simulated trading. Moneta Funded, for example, states that it is not a broker, so traders do not gain the protections of a regulated brokerage. Prop firm red flags lists what to check.
- Starting with the largest account. Bigger accounts cost more, and the limits usually scale with the balance, so the rules are no easier. Choosing an account size covers this in more detail.
- Skipping the prohibited strategies page. Rules on news trading, holding times, automation and copy trading end accounts that were otherwise profitable.
Checklist before you buy
- The firm publishes its legal entity, address and full rules.
- You know whether the maximum loss is static, trailing or end of day.
- You know how the daily loss limit is measured and when the trading day resets.
- You know whether the fee is one time or monthly, and whether an activation fee applies after passing.
- You have read the payout frequency, minimum, caps and fees.
- Your instruments and style are allowed, including news trading, overnight holding and automation.
- Your country is not on the restricted list.
For a longer list of questions, read before buying a prop firm challenge, then compare firms side by side in the prop firm directory. More introductory guides are collected under getting started.
Frequently Asked Questions
Is a prop firm account real money?
Often it is not. Many evaluation firms run both the evaluation and the funded account in a simulated environment, and pay traders real money based on the simulated profit. Some firms move consistent traders to a live account later. Topstep, for example, keeps its Trading Combine and Express Funded Account simulated and describes its Live Funded Account as real capital.
How much does it cost to join a prop firm?
Costs vary with the firm, the account size and the billing model. Some firms charge a one time fee, while others bill monthly until you pass, such as Topstep at $49 a month for a 50K Trading Combine on its Standard Path. Check for activation fees after passing, reset fees, data fees on futures accounts and processing fees on payouts.
Can I lose more than the evaluation fee?
On a standard evaluation or simulated funded account, the loss is normally limited to what you paid the firm, because a breach closes the account rather than creating a debt. Broker funding schemes can differ. Axi Select, for example, requires traders to deposit and trade their own money, so that deposit is at risk from the first trade.
How do prop firms make money?
Evaluation firms charge for challenges and often for resets, activations and add ons, and they pay traders a share of the profit made on funded accounts. Firms that trade live capital can also earn from that trading. Which model a firm uses shapes how it sets rules and payout limits, so it is worth reading its terms with that in mind.
Do I need trading experience to join a prop firm?
Firms generally do not ask for experience before selling an evaluation, but the rules assume you already have a tested plan and firm control of risk. Tight daily and maximum loss limits leave little room for learning on the job. Many traders practise on a demo account first, then buy a small evaluation once they can follow a set of loss limits for several weeks.