5 Things You Need to Know Before Choosing a Trading Prop Firm

In recent times, the popularity of trading prop firms has been on the rise. As we know, trading prop firms are companies involved in funding talented traders. They offer us the opportunity to manage their funds after passing a provided challenge phase. This allows us to handle larger amounts of capital without being burdened by any trading-related losses.

For traders, trading prop firms are considered a pathway to success in trading. By participating in the offered challenges, traders have the chance to manage substantial amounts of capital, no longer limited to trading with just a few hundred dollars or even less. This means that with increased capital for trading, traders can potentially generate larger profits, sufficient to meet their daily needs.

However, before you fully register and participate in a trading prop firm's challenge, there are several things you need to know:

1. You Don't Actually Trade with 100% of the Provided Funds

You should be aware that even though they offer funding up to hundreds of thousands or even millions of US dollars through scaling systems, you don't actually trade with 100% of that capital. This is because every trading prop firm has strict risk requirements. Your losses will be limited to a maximum of 5% per day and 10% overall. This means that if you receive funding of $5,000, you're actually funded with $500, or if you receive $10,000 in funding, you're funded with $1,000, and so on.

Since you can only use 10% of the total capital in your funded account, your risk per trade must also be based on that 10%, not the total account balance. For example, if you receive $10,000 in funding and you want to use a 5% risk per trade, that 5% should be based on 10% of $10,000, which is $1,000. So, your risk per trade is not $500 but $50. This gives you more trading opportunities because your risk is measured using the appropriate parameter.

2. High Profit Splits Are Not Necessarily Good

Typically, trading prop firms fund talented traders to profit from their performance, much like investing in a company where you expect returns from its positive performance. As an investor, you generally seek high returns, right?

The same principle should apply to trading prop firms. If they invest in talented traders, it's reasonable for them to expect high returns from the traders' performance. However, what often happens is the opposite. Trading prop firms compete to attract traders by offering very high profit splits, ranging from 80:20 to 90:10, where traders receive 80 to 90 percent, while the trading prop firm takes 10 to 20 percent, even though the risk of losing money entirely rests with the prop firm. Some trading prop firms even offer a 100% profit split for traders, meaning the prop firm doesn't take any of the profits generated by the trader.

This raises questions about the business model of trading prop firms and where their profits come from. The answers to these questions are speculative, but offering high profit splits could indicate two things. First, it could be a marketing strategy to catch up with more established prop firms like FTMO, which is well-known and trusted by many traders. Second, it's possible that trading prop firms earn their profits from traders who fail to pass the challenge phase. Offering high profit splits may entice traders to purchase challenge accounts, ultimately increasing the profits of the trading prop firm since most traders are likely to fail. However, please note that this is speculation, and there isn't enough data to state it as a fact. Therefore, it's essential to do further research to uncover the truth.

3. Always Read the Terms & Conditions to Avoid Pitfalls

Trading with funds from a Prop Firm is different from trading with your own capital. Since they fund you and shield you from any risk, you must adhere to the policies set by the trading prop firm. These policies generally dictate what you can and cannot do while trading, both technically and non-technically. For example, they might specify which trading strategies are allowed or not, the maximum daily risk you can take, the maximum number of positions you can have open simultaneously, and more. It's crucial to be aware of these rules by reading the terms and conditions of the trading prop firm you're using.

Moreover, each trading prop firm has its own set of policies. So, even if you've registered with one trading prop firm and are familiar with their rules, you still need to review the rules when registering with a different one. While most rules will be similar, there can be differences between trading prop firms, which can be a factor in your success if you're not aware of them.

4. Choose a Trading Prop Firm with Affordable Prices

If you intend to participate in a Challenge from a Trading Prop Firm, it's advisable to find a prop firm that offers affordable prices. However, this doesn't mean you should seek out a prop firm with prices that are too low and seem unrealistic, as these are likely to be scams. Instead, look for a prop firm that offers reasonable prices. You can compare prices among various trading prop firms that you find trustworthy and determine which one provides the best offer.

The reason for choosing a Trading Prop Firm with affordable prices is that passing the challenge, especially on your first attempt, is not easy for most traders. So, don't rush to spend your money. Assess your abilities first by participating in a reasonably priced challenge. If you pass and get funded by the trading prop firm, you can consider taking on more challenges, either with the same prop firm or different ones.

5. Pay Attention to Negative Reviews

Other people's reviews are valuable assets for evaluating the reputation of a trading prop firm. However, you should exercise caution because reviews can be manipulated. There are many ways for a proprietary trading firm to create a positive image online. One common method is to hold giveaway events that encourage participants to show support for the trading prop firm by leaving comments, likes, or sharing their social media posts. While this is a legitimate marketing strategy, as a consumer, you won't gain anything from it.

Because companies encourage others to provide positive reviews, those positive reviews can't be the sole basis for evaluating a trading prop firm. Instead, you should look for negative reviews. If you find them, it can serve as an indicator of the risks when choosing a particular trading prop firm. For example, if you come across a negative comment from someone complaining about the slow payout process, it suggests that you might encounter the same issue if you choose that trading prop firm. You can decide to proceed with the firm if you're comfortable with the risk or explore other trading prop firms if you find the risk too significant.

The essence of all this is to be cautious and consider all the risks before choosing and purchasing a challenge account from a trading prop firm. Even though you are funded, you still need to spend money to buy a challenge account. This means you still have financial risks that can affect you. Therefore, it's essential to stay vigilant, especially considering the uncertainties in the business models of these trading prop firms.

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