Pros and Cons of Prop Trading FX | Pepperstone (2024)



Proprietary (prop) trading firms are by no means new, but they have grown in popularity over the last decade. A prop trading firm looks to recruit talented traders and fund them with the company’s capital. The funds that a trader makes, is then split between the trader and the company. The profit share is between 50 – 95%, with the trader taking the lion's share.

Things to consider

It all sounds great, so why have some prop trading firms gained a poor reputation in this arena?

In this article we are going to discuss the various stages of becoming a funded trader, the limitations that are levied on some accounts, drawdowns, profit targets, and more.

The ability to use a robot – have a profitable robot? Some prop firms will let you auto trade.

How to become a funded trader

It is not as easy as signing up to a reputable company, paying your fees and being let loose to trade the company’s capital. Most prop trading firms have a two-phase evaluation process or challenge.

  • Step 1 – You pay your enrollment fee. You will then be given a trading period to complete the first stage of your enrolment. There will also be a minimum amount of trading days, a maximum daily loss, maximum overall loss, and a profit target. We will discuss these matters in more detail later

  • Step 2 – You pay no extra fee. You have a new challenge duration, loss restrictions and profit target. The levels may well differ from Step 1.

Passing the two-phase enrollment period, without breaking any of the rules, results in a funded account. It should be noted that funded accounts still must adhere to certain trading parameters or restrictions.

Trading Power

Companies offer different scales of trading power at enrolment. This could be between $10,000 to $200,000 in size. The higher the account, the higher the enrollment fee.

It should also be noted that different account sizes come with different profit and loss parameters. In general, the larger the account, the larger profit target and maximum loss or drawdown allowed.

Scaling up

If you can constantly generate profits, then your account size could increase according to the company’s scaling plan. The more profits you generate, the higher your funded capital. The maximum funded capital varies depending on the prop firm. One offers a maximum of $150k while an Israeli based company scales up to $4m per account, with a trader allowed to have 7 accounts in total.

How do prop firms make money?

Trading platform providers openly display a risk warning on their sites. The risk warning will highlight the percentage of retail traders that lose money with that provider. This can make for some scary reading with the average being between 70-80%.

Although there are no hard figures published to confirm this comparison, if prop trading firms have a failure percentage close to these figures, that is a lot of traders who will not make it through the initial stages.

We should also remember that a prop firm evaluation process comes with added rules, such as the limitation on the holding period of a trade, the trade size, drawdowns, and the ability to trade over high impact economic releases. These restrictions, possibly compounding the number of traders who fail.

During the initial challenge you are trading on a demo account. If you pass or fail, the prop company has no financial gain or loss from your trading. You can also pay to extend your trial period or reload and try again for a fee.

If you make it through the trial period and become a funded trader, it is likely that the prop fund has found a disciplined and productive partner. They will then profit from your continued success. This sounds like a good business model for the prop firms, with limited drawdowns and risk.

It is not all one-sided (pros)

Should a prop trading firm be considered by experienced traders? There are various ways that you can benefit from a prop trading account:

  • Discipline in your trading – having to adhere to set parameters can result in a trader being more productive and with a better knowledge of drawdown periods. Not chasing losses or overtrading.

  • Growing your trading capital – although you can use compound interest in your personal trading account, depending on the prop firms scaling policy, this can be a quicker route to higher trading capital.

  • Increased percentage with increased capital – some firms offer tiered percentage performance dependent on working capital. The bigger the account the greater the percentage.

  • Leverage – various levels of leverage to increase a trader’s exposure in the market.

  • Support – chat, webinars, trade ideas, stats calculator, 1-on-1 coaching, workshops, trading tools. Established prop shops offer an array of trading tools and add-ons.

  • Free trial – some, but not all, offer a free trial. A try before you buy scheme.

  • Initial fee refunded – the initial subscription fee reimbursed after the challenge stages are complete.

  • Unlimited evaluation period – no time limit in the challenge stage.

  • Your first pay-out – 100% trader pay-out up to the first £5k profit.

  • Remote working – the ability to work from home.

  • Quick withdrawal – some offer fast withdrawals at your request. Others are timed weekly, bi-weekly, or monthly.

  • No minimum pay-outs – no need to build a big balance before you withdraw.

  • Profit split or bonus after the testing period – if you make it through the testing period, you will get rewarded.

  • One stage or no valuation process – a shortened period or no evaluation at all.

    Pros and Cons of Prop Trading FX | Pepperstone (1)

But there are aspects you need to be aware of (cons)

You are tempted to apply for a funded account. What pitfalls should you be aware of?

  • The rules – they need to be clear and easy to understand. You don’t want to get your account suspended or closed because you broke one of the terms and conditions.

  • Minimum trading Days – the prop firm doesn’t want you to be a 1-trade-wonder. Most firms will look for a minimum amount of trading days. A trading day being a day when a new trade is opened.

  • Maximum trading Days – be careful that your trading style will reach the target in the allocated amount of time. If you have a maximum period of 30 day and a minimum period of 10 days, that means you need to place a trade on average of 1 every 3 days. Will your system struggle with the ruling?

  • Closing trades before the weekend – you need to ask yourself ‘is this restrictive to the way that you trade’? Combined with maximum and minimum trading days, can it be done?

  • Closing trades before the evening – same as above.

  • No trading over high volatility news events - is this restrictive to the way that you trade?

  • Limited products – some prop firms only offer futures. Perhaps you are a crypto trader. There are limited providers for these products.

  • Maximum open trades – do you scale into positions? Is the limitation going to be an issue?

  • Recurring payments – is it a one-off fee or a recurring monthly payment?

  • Max funding – how much funding do you require?

  • Trailing stops or drawdown – is this calculated from your current equity or your closed trade account balance?

Things to consider (cont.)

As with any new venture, there are a lot of factors to consider before setting out to be a funded trader.

Don’t chase the capital

To an inexperienced trader, the chance to trade ‘size’ is exciting and compelling. You have £1000 in your trading account and are only chipping away, making limited progress. The promise of a larger account, using some of your start up money to pay the challenge fee, is tempting. Make sure that you have a trading system that works, at least on a demo account. Experience first, then commitment.

Clear T & Cs

You shouldn’t have to look hard for the rules of the challenge and partnership. These should be front and centre and easy to understand, not hidden on a back page or in a linked, and long, disclaimer.

Supported platforms

What platforms can you trade from? Do you have experience in the functionality?


Does it make for a sound investment? How do the fees vary from firm to firm?

Reputable Firm

How long has the firm been established? Do they have any recommendations? What is their Trust Pilot review? How many reported traders do they have on their books?


Are there any hidden fees? Is it just a one-off fee or is it ongoing? If it is on-going, what does it pay towards?

Pros and Cons of Prop Trading FX | Pepperstone (2024)


What are the negatives of prop firms? ›

Limited Control Over Capital and Payouts:

- Traders in prop firms often have limited control over the firm's capital. They may need to deposit their own money as collateral or risk management. - Additionally, payouts are subject to the firm's rules, which may restrict a trader's access to profits.

Is prop trading worth it? ›

While prop trading is one of the most profitable opportunities, it is affected by asymmetric risk. This means that the profit-sharing ratio may be from 75% to 90%, but you bear 100% of the risk of your trades. When becoming a prop trader, you often need to deposit an amount of money known as your risk contribution.

What percentage of traders pass prop firm challenge? ›

That result should look catastrophic for anyone who hopes to join a prop firm. The article from Lux Trading Firm provides slightly different results. According to it, 4% of traders, on average, pass prop firm challenges. But only 1% of traders kept their funded accounts for a reasonable amount of time.

Can you make a living with prop trading? ›

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity. It's arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you'll earn some percentage of it.

What happens if you lose money in a prop firm? ›

Profits from trades are generally divided between the firm and the prop trader; however, the risk distribution is asymmetric. This means that in the event of a loss, the trader bears 100% of the losses, while they don't receive 100% of the profits.

Is prop trading risky? ›

Since proprietary trading uses the firm's own money rather than funds belonging to its clients, prop traders can take on greater levels of risk without having to answer to clients.

Do prop firms really pay out? ›

Statistics on Average Trader Payouts

Profit Split: The average prop firm will offer a 80-20 profit split once you become a funded trader. TFT, on the other hand, gives up to a 90% split, — even as high as 95% in some promotions — the highest in the industry.

Do prop traders make a lot of money? ›

In conclusion, the income of prop firm traders can vary greatly depending on several factors such as experience, performance, and the size of the firm. On average, a junior prop trader can expect to earn anywhere between $50,000 to $100,000 per year, while a senior trader can make upwards of $500,000 annually.

How stressful is prop trading? ›

Prop trading can be highly stressful due to the fast-paced nature of markets and the pressure to make split-second decisions. Working in the financial markets as a prop trader comes with a series of demanding hurdles. Such traders face an environment filled with: Intense rivalry.

What are prop firm challenges? ›

A Prop Firm Challenge is a structured evaluation process designed to identify skilled traders who can potentially join the prop trading firm and trade the firm's capital. These challenges are a crucial entry point for aspiring traders who wish to access substantial trading capital and the opportunities it brings.

Can prop firms manipulate the market? ›

Firms that operate proprietary trading platforms can use them to manipulate quotes, making traders experience losses in an otherwise profitable trade.

Are prop firms reliable? ›

Prop businesses nowadays are utterly unregulated and far apart from the banking industry. As a result, these internet prop companies are legitimate and not a fraud. Scammers do exist in the sector, though, and they attempt to exploit the current market because there isn't much oversight.

How many people fail prop firms? ›

Historically, retail prop firm challenges have been designed to set traders up to fail. They're given harsh targets, limited time, no support, and huge leverage – a perfect storm! It's not surprising that 95% of traders fail their challenges!

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