Understanding Prop Firms and Their Challenges
A prop firm (proprietary trading firm) is a company that offers trading challenges for customers to purchase. If the customer successfully completes the trading challenge within the firm's rules and guidelines, the prop firm provides a "funded account."
The Benefit of this is leveraging a small amount of your own capital to obtain a large amount of a prop firms capital. If done correctly, you could potentially leverage millions of dollars through prop firms capital using a fraction of your own capital in initial challenge costs.
10% of 10,000 is 1000 but 1% of a million is 10,000. So you can see how powerful capital is in trading. 1% profit is low risk on a million but still high reward, while 10% on 10,000 is high risk and low reward.
How It Works:
Challenge Completion:
- When you buy a trading challenge from a prop firm, you receive a demo account to demonstrate your trading skills. You'll need to meet specific performance metrics and adhere to risk management rules set by the firm.
- If you successfully complete the challenge, meeting all the criteria, you are awarded a funded account.
Profit Sharing:
- Any profit made on this funded account can be withdrawn. Generally, the prop firm takes a percentage, but most firms offer around 80% of the profit to the trader.
- Payout frequencies vary among prop firms, but typically you can request a payout every two weeks.
Types and Sizes of Challenges:
Challenge Sizes:
- Challenges are available in various sizes, depending on the amount of funded capital you aim to secure. For example, a challenge for a potential $100,000 in funded capital might cost about $450-$550 USD.
- Most prop firms offer challenges starting from $5,000 up to $200,000 in potential funded capital, with some firms offering even larger challenges up to $1 million.
The Process:
- Purchase a Challenge:
- After purchasing a challenge, you will receive a demo trading account along with the credentials needed to start your challenge.
- Trading Platforms:
- Prop firms use different trading platforms to facilitate the challenges. Popular platforms include MetaTrader 5 (MT5), cTrader, DxTrade, and Match-Trade.
- Funding:
- If and when you pass the challenge, you will go through a KYC (Know Your Customer) verification process to confirm your identity. Typically, you will also need to sign a trader's contract between yourself and the prop firm. Once these steps are completed, you will receive your funded account credentials, enabling you to log in and start trading.
Types of Challenges: