Proprietary trading firms, or prop firms, are financial institutions that provide traders with the capital, tools, and technology to trade financial instruments such as stocks, futures, and forex.
Prop firms are unique in that they offer traders a funded account, allowing them to trade with the firm’s capital while sharing in the profits generated from their trading activities.
This article aims to provide traders with a detailed outline for choosing the best prop firm for a funded account, covering the essential factors that need to be considered when making this critical decision.
Table of Contents
Benefits of trading with a funded account
Trading with a funded account at a prop firm offers numerous benefits to traders, including:
Access to significant capital
Prop firms offer traders the opportunity to trade with significant amounts of capital, which may not be available to the average retail trader.
Reduced risk
Trading with a funded account reduces the risk associated with trading with one’s capital. This is because traders are trading with the firm’s capital, not their own, and the firm is typically responsible for covering any losses.
Access to advanced technology and tools
Prop firms often provide traders with access to advanced trading platforms, analytical tools, and resources that may not be available to retail traders.
Learning opportunities
Prop firms often offer training and educational resources to traders, allowing them to improve their trading skills and knowledge.
Flexibility
Trading with a funded account at a prop firm allows traders to trade on their terms, without having to deal with the restrictions and limitations imposed by traditional financial institutions.
Factors to consider when choosing a prop firm for a funded account
The following factors should be considered when choosing a prop firm for a funded account:
Funding Requirements and Conditions
Traders should consider the funding requirements and conditions when choosing a prop firm. This includes the minimum account size and funding levels, profit-sharing arrangements and payout structures, evaluation periods and performance targets, as well as drawdown limits and risk management protocols.
As a trader, you should ensure that you understand the funding requirements and conditions before choosing a prop firm, as they can significantly impact your trading activities.
Minimum Account Size and Funding Levels
Prop firms may have different minimum account sizes, ranging from a few thousand to several hundred thousand dollars.
Additionally, prop firms may require traders to meet specific funding levels or maintain a minimum account balance.
Traders should consider their trading objectives and financial circumstances carefully before choosing a prop firm, ensuring that the minimum account size and funding levels are suitable for their needs.
Profit Sharing and Payout Structures
Prop firms typically take a percentage of the profits generated by traders, ranging from 5% to 50% or more.
Traders should consider the profit-sharing arrangements and payout structures offered by prop firms carefully, ensuring that they are fair and reasonable.
Additionally, traders should consider any additional fees or charges that prop firms may impose, such as account maintenance fees or withdrawal fees.
Evaluation Periods and Performance Targets
Prop firms may also require traders to meet specific evaluation periods and performance targets before granting them access to additional capital or increasing their profit share.
Evaluation periods may range from several weeks to several months, during which traders must demonstrate consistent profitability and risk management.
Additionally, prop firms may set specific performance targets, such as achieving a certain percentage of profits or meeting specific drawdown limits.
Drawdown Limits and Risk Management Protocols
Finally, consider the drawdown limits and risk management protocols implemented by prop firms.
Drawdown limits refer to the maximum percentage of losses that traders are allowed to incur before an account is closed or capital is reduced. Risk management protocols may include position sizing limits, stop-loss orders, and other risk mitigation strategies.
Consider carefully how the rules set out by the prop firm match with your own trading strategies.
Available Markets and Instruments
The range of tradable markets and financial instruments offered by a prop firm is another critical factor to consider. Traders should look for a prop firm that offers access to a range of markets, including stocks, futures, forex, and options.
Consider the availability of international markets and the diversity of financial instruments and products offered by the firm.
Traders should choose a prop firm that offers the markets and instruments that they wish to trade.
Range of Tradable Markets
Prop firms may specialize in a specific market, such as forex or futures, or offer access to multiple markets, including stocks, commodities, and cryptocurrencies.
Each market presents its unique challenges and opportunities, and traders should consider their trading objectives and preferences before selecting a prop firm.
Access to International Markets
Prop firms may offer access to a variety of international markets, including those in Europe, Asia, and the Middle East, allowing traders to take advantage of the fluctuations in currency and asset prices.
However, traders should consider the additional risks associated with trading in foreign markets, such as currency and political risk.
Diversity of Financial Instruments and Products
Finally, consider the diversity of financial instruments and products offered by prop firms.
Prop firms may offer a range of financial instruments, including stocks, bonds, options, and futures, allowing traders to diversify portfolios and take advantage of different market conditions.
Additionally, prop firms may offer access to specialized financial products, such as exchange-traded funds (ETFs) or structured products, providing additional opportunities to generate returns.
Trading Platform and Technology
As technology continues to evolve and shape the financial industry, traders are presented with an ever-increasing range of tools and platforms to support trading activities.
Proprietary trading firms, or prop firms, are no exception, and traders should consider the trading platform and technology offered by a prop firm when selecting a funded trading account.
User Interface and Customization Options
The trading platform is the primary tool used to execute trades, monitor positions, and analyze the markets.
Most prop firms offer well-recognized platforms such as MetaTrader. For those that don’t, ensure the software includes a user-friendly interface that is easy to navigate and customize to your own preferences.
Customization options may include the ability to create custom watchlists, chart layouts, and trading strategies, and should allow access to the information needed quickly and efficiently.
Order Execution Speed and Reliability
One of the most critical factors to consider when evaluating a trading platform is the speed and reliability of order execution.
Prop firms may offer direct market access (DMA) or use a third-party order execution provider to facilitate trades.
Ensure that the order execution process is fast and efficient, with minimal latency and slippage.
Additionally, consider the reliability of the trading platform and ensure that it is stable and secure.
Charting and Analytical Tools
To make informed trading decisions, traders need access to a range of analytical tools and data.
The trading platform should offer robust charting capabilities, allowing easy analysis of price movements, identify trends, and identify potential trade opportunities.
Additionally, the platform should provide access to a range of technical indicators and drawing tools, allowing traders to customize their analysis to their specific trading strategies.
Automated Trading Options and APIs
Many prop firms offer automated trading options, allowing traders to execute trades automatically based on predefined criteria.
These options may include the ability to use pre-built algorithms, create custom trading strategies, or integrate with third-party trading software.
Additionally, traders may require access to application programming interfaces (APIs) to build their automated trading systems or to integrate with other trading tools.
Mobile and Web-Based Trading Capabilities
Finally, consider the availability of mobile and web-based trading capabilities when evaluating a trading platform.
In today’s fast-paced markets, traders need to be able to access their trading accounts from anywhere and at any time.
The trading platform should offer a mobile app or web-based platform that allows easy monitoring of positions, the ability to execute trades, and access analytical tools from a mobile device or web browser.
Trading Fees and Commissions
When considering a funded trading account with a proprietary trading firm, be aware of the fees and charges associated with the account.
Trading fees and commissions can significantly impact profitability, and traders should carefully evaluate the fee structure when selecting a prop firm.
Commission Rates and Spreads
Commission rates and spreads are the primary fees charged by a prop firm for executing trades.
Commission rates are typically charged as a percentage of the trade’s value, and the spread is the difference between the bid and ask prices for a particular financial instrument.
Compare the commission rates and spreads offered by different prop firms and select a firm that offers competitive rates, especially if your strategy includes higher frequency trading such as scalping.
Funding and Withdrawal Fees
In addition to commission rates and spreads, consider funding and withdrawal fees when evaluating a funded trading account.
Prop firms may charge fees for depositing funds into a trading account, as well as for withdrawing funds from the account.
These fees can significantly impact your profitability, particularly if you are making frequent deposits or withdrawals.
Additional Fees and Charges
When evaluating a prop firm, be aware of any hidden fees or charges associated with a funded trading account. These fees may include fees for using particular trading platforms or accessing specific financial instruments. Some prop firms also charge a monthly fee, in addition to a profit split.
Carefully review the terms and conditions of the funded trading account and ensure that you understand all the fees and charges associated with the account.
Risk Management and Performance Evaluation
Risk management is a critical component of successful trading, and proprietary trading firms are no exception.
When evaluating a funded trading account with a prop firm, consider the firm's risk management policies and procedures, position sizing and stop loss guidelines, regular performance evaluations and feedback, and accountability and disciplinary measures.
Risk Management Policies and Procedures
The first factor to consider is the prop firm’s risk management policies and procedures.
A good risk management framework should identify and measure risk, monitor exposure, and have clear guidelines for risk mitigation.
Traders should evaluate the firm’s policies and procedures to ensure that they are aligned with their risk own tolerance and trading strategy.
Position Sizing and Stop Loss Guidelines
Another critical factor to consider is the firm’s position sizing and stop loss guidelines.
Position sizing refers to the amount of capital allocated to each trade, while stop loss is the level at which a trader exits a losing trade.
A good prop firm should have clear guidelines for position sizing and stop loss, which should be incorporated into your trading strategies.
This will ensure you don’t over-expose your account and risk losing the account.
Regular Performance Evaluations and Feedback
Some prop firm provide regular performance evaluations and feedback to traders.
This evaluation process should be transparent and based on clear metrics, such as profit and loss, win rate, and risk management.
Traders should evaluate the frequency and quality of the performance evaluations provided by the firm and ensure that they are receiving feedback that is relevant to their trading strategy and objectives.
Accountability and Disciplinary Measures
Finally, consider the firm’s accountability and disciplinary measures.
A good prop firm should have clear guidelines for trader conduct, including prohibited activities and ethical standards.
Traders should also evaluate the firm’s disciplinary measures for traders who violate these guidelines.
Disciplinary measures should be fair and transparent and should be applied consistently to all traders.
Support and Training Resources
When considering a funded trading account with a proprietary trading firm, traders need to consider the support and training resources offered by the firm.
Support and training resources can help traders improve their skills and knowledge, build confidence, and ultimately achieve greater success in their trading activities.
Availability and Responsiveness of Customer Support
One of the essential support resources that a prop firm should offer is customer support.
Evaluate the availability and responsiveness of the firm’s customer support team.
The support team should be easily accessible and respond promptly to inquiries and concerns.
They should also be knowledgeable and able to provide useful advice and guidance.
Educational Materials and Resources
Another essential resource is the availability of educational materials and resources.
The firm should offer a variety of educational resources, such as webinars, videos, and articles, to help traders improve their knowledge and skills.
These resources should cover a range of topics, including market analysis, trading strategies, risk management, and technical analysis.
Mentoring and Coaching Programs
Some prop firms may also offer mentoring and coaching programs to their traders.
These programs can provide valuable insights and guidance, helping to improve your trading skills and achieve greater success.
A good mentoring and coaching program should include regular feedback and support, customized trading plans, and performance evaluations.
Community Forums and Networking Opportunities
Finally, consider the availability of community forums and networking opportunities.
These resources can provide you with the opportunity to connect with other traders, share insights and experiences, and build a supportive community.
This can be particularly valuable for new traders who may feel isolated or unsure of their trading strategies.
Conclusion
Proprietary trading firms can offer traders the opportunity to trade with a funded account, providing access to capital and resources that can be used to build a successful trading career.
However, with so many prop firms to choose from, it can be challenging to determine which firm is the right fit. In this article, we have explored several factors that you should consider when choosing a prop firm for a funded account.
Choosing the right prop firm for a funded account requires careful due diligence and research. Traders should conduct thorough research on the firm’s reputation, track record, and regulatory compliance, as well as evaluate the firm’s trading infrastructure, support and training resources, and fees and commissions.
Final Tips for Selecting the Best Prop Firm for a Funded Account
Evaluate multiple firms: Consider several firms and compare them based on the key factors outlined above.
Ask questions: Ask the firm’s representatives questions about their services, funding requirements, trading infrastructure, and support and training resources.
Read the fine print: Review the firm’s agreements and contracts carefully, paying attention to fees, profit sharing arrangements, and risk management policies.
Seek referrals and references: Talk to other traders who have worked with the firm or seek referrals from industry professionals.
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