Prop trading is rising in popularity as it allows a trader to have access to significant trading capital without spending much of their own money. But not everyone is convinced that prop trading is worth considering, being just a way for prop firms to drain money from inexperienced traders. Is prop trading a good way to increase your trading profits or just a waste of your time and money?
To help you to get a clearer understanding of the matter, this article will discuss the pros and cons of prop trading and will try to explain who should consider attempting at getting funded by a prop firm and who is better to avoid prop trading. But first, you need to understand the basics.
What is prop trading?
Proprietary firms (often called prop firms) are firms that give traders access to the firm's capital in return for a share of profits the trader will generate. While previously prop trading was conducted on a physical trading floor and was not very different from a regular job, nowadays prop firms work for the most part online, attracting traders from all over the world. To apply for funding, a trader typically needs to pass an evaluation to prove that they are able to make a profit. The evaluation usually entails reaching a certain profit target within a specified time limit and under certain rules. While there are prop firms that do not require an evaluation, they are low in number, have a much bigger entry fee, and usually have a worse profit split.
So, you get a significant amount of money in return for a small fee, can get a huge profit if you are successful, and if you are not then there will be no repercussions for you outside of losing access to the funding (and even then, you can just take the evaluation again, sometimes at a discount). Does it not sound too good to be true? Well, things are a bit more complicated.
The biggest issue the opponents of prop trading have is the rules for the evaluation as well as for trading on a live account after passing the evaluation. Many traders find them too restrictive to allow successful trading, and that makes it too easy to fail the evaluation or to lose access to funding even if you are lucky to get it. In fact, the criticism you will likely encounter the most is that the main source of revenue for prop firms is the evaluation fees from traders, who lose evaluation and have to attempt to pass it again and again, not profits generated by successful traders. The proponents of prop trading argue that those restrictions help to learn trading discipline and risk management. After all, the drawdown limit (one of the most discussed and criticized restriction in discussions among traders) encourage you to be more responsible and avoid excessive risk. And such an approach is useful not only in prop trading but in regular trading as well.
Pros and cons of prop trading
Pros
Getting funded by a prop firm has significant advantages such as:
- You get access to significant trading capital that can get you bigger profits compared with your own small account.
- You do not risk your own money (outside of evaluation/entry fees).
- Rules of prop firms encourage beginner traders to learn risk management, including the value of the usage of stop-losses.
Cons
But prop trading also has noticeable cons that traders should be aware of:
- Prop firms have rules of trading that can limit trading strategies available to you severely,
- If you fail to adhere to the rules, you will fail the evaluation or lose access to funding if you have already passed one. Then you will have to pay evaluation fees again.
- While many prop firms have a scaling account size, which increases if you manage to generate a decent profit, it has a hard cap. That is compared with theoretically unlimited account growth if you trade on your own.
- Your profitable trading strategies can (and probably will) be copied by the prop firm you are trading with. And not every trader wants to share their strategies with others.
Is a funded account worth it?
To benefit from the advantages prop firms are offering, you need to be not just profitable but consistently profitable. Few bad trades can wipe out your account and any progress you had towards scaling up the size of your account. That means you need to have knowledge about trading and preferably some experience.
And here lies the problem. Prop trading is most attractive for beginner traders who do not yet have a decent amount of money to invest in a trading account. But beginners are very likely to fail the evaluation or burn their accounts even if they are lucky to get funding.
Therefore, before considering applying for a funded account with a prop firm, you should be certain that you can get consistent results. Trade a demo account first. When you become more confident and find a trading strategy that is able to generate profit consistently, open a live account with a small sum. And only after you manage to get profit using real money you may start to think about joining a prop firm.
So, should you consider getting a funded account?
In conclusion, you should consider getting funded if:
- you think that to make a reasonable profit from your trading you need more money than you have;
- risk of losing your own money stresses you too much;
- you have a trading strategy that can generate a profit consistently;
- your trading strategy fits into the rules of the prop firm you want to trade with;
- you do not mind sharing your profits;
- you accept that the prop firm will be able to copy your strategy.
You should not consider getting funded by a prop firm if:
- you are just learning how to trade;
- your trading does not have consistent results;
- your trading strategy does not align with the requirements of the prop firm;
- you do not like the idea of sharing profits;
- you want to keep your strategies to yourself;
- you already have a capital big enough to make a profit you are happy with;
- you have enough money to not be afraid of losses while trading.
Conclusion
An account funded by a prop firm can give you access to a big capital that can increase your profits compared with trading with your own money. Additionally, it limits the risk of losing your own money. But it is worth considering only if you are confident that you can make a profit consistently and your trading style does not contradict the requirements the prop firm imposes on its traders.
If you want to share your opinion, observations, conclusions, or simply to ask questions about whether a founded account is really worth it, feel free to join a discussion on our forum.
