Prop Trading Firms - A guide on how to get Funded Account

That’s when the game gets interesting. Funded accounts may reach up to $200,000 of real money while your initial capital could be just $1,000 or less. To get the big bucks, however, you need to prove you are worthy.

In other words, you need to win a challenge before you can qualify for a funded account by the prop firm. Just as challenges vary in their difficulty and duration, prop firms differ in their offerings. This is why it is crucial to choose a prop firm that you understand and can trust.

Let’s dive into the details of what the funded trading account is all about.

What is a Funded Trading Account

The funded trading account is essentially a trading account that receives a cash boost from a prop firm. To break this down, a funded trading account holds money from your broker that is 100% available for you to do your trades.

Think of this funded account as if it was your own Wall Street cubicle and the broker was a hedge fund you work for. In reality, this is not too far from the truth. You are handed money from your broker and trade that money however you see fit. At the end of day, whatever profits you made, you get to split them with your broker, since you are trading on their behalf with their money.

The splitting part is what distinguishes one prop firm from another. Some will take a 50/50 split while others will be happy with just 20% of the profits, allowing you to happily pocket the rest. Funded accounts can be a hugely profitable venue if you learn how to properly navigate them through the financial markets. They come with leverage, exposure to lots of asset classes, and all features that are available to regular trading accounts.

Regardless, any funded account requires you to have proper portfolio management skills, investment objectives, a real-time trading strategy along with the right trading psychology and discipline. You can trade stocks, exchange-traded funds (ETFs), mutual funds, currencies, crypto, and anything else listed on your broker’s marketplace.

What is a Prop Trading Firm

A proprietary trading firm, commonly known as prop firm, is a financial institution that uses its own funds to trade for its own account. Some prop firms take this definition and go a few steps forward by allocating capital to retail traders who trade on behalf of the company. Traders are given company funds and can go into every market – stocks, currencies, crypto, or commodities, and execute trades as they see fit.

A prop firm could be an online broker or trading companies broadly. They will usually get a piece of the profit in a defined split that could go as low as 20% for the broker and 80% for the trader. Proprietary trading with a focus on retail investors has been growing in popularity thanks to the generous opportunities it offers. Not every individual market participant can put in $200,000 in their trading account. But that’s no problem for a prop firm that has ample resources and can offer access to financial markets.

It's worth noting that prop firms are using their powers to enable traders to experience their dream job. Managing money for a fund doesn’t mean you have to go on Wall Street, intern for a year, and then hope to get an offer.

The easier way to manage hundreds of thousands of dollars is to become a funded trader. While it’s easier, it’s not that easy.

How to Become a Funded Trader

Traders who get into an agreement with a prop firm become funded traders. In practice, this means that they get money from the broker and trade with complete freedom and no intervention from the firm that funded them.

Anyone can become a funded trader. The only thing standing in the way is a challenge. Funded traders, or prop traders, must prove they know their way around the financial markets. That’s why the prop firm gives them a trading challenge that must be passed according to the set standards.

Since you will be trading with the firm’s capital, you need to first make profits with your own money. You are required to open an account and fund it just as you would with a regular trading account. Then, you have to use this money to make more money. It doesn’t matter how much you put in. What matters is whether you can win the challenge.

The 2-step Evaluation

The challenge is usually a two-step evaluation. The first step is to generate a 10% profit on your account in 30 days. This may look easy but many brash traders have failed to accomplish the task. The second step is to make about an 8% return on your investment in 60 days. This is considered a less intensive trading experience since you are given more time and must return comparatively less on your investment.

Along the way, your max daily loss is usually 5% or so, while the max loss for the entire period is 12% or around it. Also, an important perk about the funded account challenge: some brokers, or prop firms, actually refund your initial deposit that you used to beat the challenge. So make sure you check this, too. Once you beat the challenge, you are officially a funded trader, or prop trader.

Let’s summarize.

Stage 1:

• Profit target: 10% or so
• Duration: 30 days max
• Max daily loss: 5% or so
• Max overall loss: 12% or so

Stage 2:

• Profit target: 8% or so
• Duration: 60 days max
• Max daily loss: 5% or so
• Max overall loss: 12% or so

How to Win the Trading Challenge

The funded account challenge is the only obstacle standing between you and up to $200,000 in company capital. Winning this challenge, however, is tricky and requires increased focus and a robust trading strategy. So, how to do it?

First off, know what is required. Carefully go through your prop firm’s terms and conditions about the challenge. Make sure you understand them completely and you are aware of every little detail in the program. Once you can confirm the challenge is acceptable, it’s go time. It’s your chance to show off your trading skills and impress with outstanding performance.

As a trader, you ought to have a strategy that will help you navigate the volatile waters of the financial markets. Keep in mind that the broker, or prop firm, will take no effort to help you win the challenge. You are left to your own skills and knowledge about trading.

In order to beat the challenge and get funded, you need to use a trading strategy. Relying on rules and principles in trading will allow you to keep a level of control and risk management that will help you advance in the challenge. There are four main areas of expertise that you need to be aware of so you can win the challenge. In short these are: fundamental analysis and technical analysis as the two main pillars of market research. And day trading and swing trading as the two main strategies to execute when you set out to trade in any market.

Fundamentals: What Moves Markets

Fundamental analysis is vital to win the funded account challenge as it studies how economic news, reports, and statistics affect the financial market. Since currencies and commodities, for example, are traded on a multinational level, global economic events play a role in their valuation. In other words, when creating your funded account trading strategy, you need to incorporate monitoring global news so you would stay in the know. Major news and reports include:

• Interest rate decisions: The US Federal Reserve and the European Central Bank are the most powerful central banks in the world. If they signal an interest rate hike is coming, the market will react to that.
• US nonfarm payrolls: released every first Friday of the month, the US nonfarm payrolls are perhaps the most important monthly report. It’s closely monitored by forex traders as it reveals the pace of the US economy.
• Gross domestic product (GDP): The GDP report, released quarterly, or monthly, represents the growth of an economy as a whole. The most common measure is on an annual basis. If the report indicates growth year-over-year, this is considered positive news and may fuel the national currency to new heights.

Other keenly-watched economic news and reports include:

• Inflation data (consumer price index)
• Initial jobless claims
• Central bank meetings
• Unemployment rate
• Retail sales reports

All of this could be tracked in the economic calendar. These reports are crucial for the health and progress of any major economy. For that reason, funded account traders observe them and base their trading decisions on what the readings show.

To become a more successful trader and to make the most of your trading challenge, stay ahead of market news and expected developments. This could include central bank decisions, job reports (non-farm payrolls), geopolitical tensions, or any major news in the economic calendar.

Technical Analysis: How to Read the Chart

Technical analysis is the other deeply studied branch among prop traders that win the challenge. It is the process of reading and interpreting chart data and price data. In more detail, technical analysis gives you insight into price action as seen on the chart of any financial instrument.

Formulating a trading plan in your prop journey will undoubtedly include reading a chart and making decisions on it. The chart will let you see where the price has been. Based on that, technicians work with the aim to understand where the asset may go next.

More specifically, technical traders believe prices move in certain models and patterns. That means once you spot a pattern in the making, you could predict with a high-level of accuracy the direction of the trend.

Technical analysis, also called chart reading, goes well with fundamental analysis as it gives you a more complete picture of what is going on with any given asset. To this end, aim to do proper chart reading in order to be able to identify trends, where they form, and where they may reverse. This will give you an edge in your trading challenge.

Day Trading vs Swing Trading

Trading takes many forms and shapes but the most popular ones are those: day trading and swing trading. Depending on your own approach to markets, you could decide to focus more on each one, or combine them for a more complete trading style.

Day trading is the act of holding positions only for a single day, or market session. In other words, you get in and out of the market in one day, without carrying your trades into the next day. This trading style is suitable for more dynamic traders who are focused on moves lasting not more than a day.

Swing trading is a strategy that describes holding a financial asset for longer timeframes, usually weeks to months. This trading style is tailored for market participants who want to stay in the market for more than a few days. It is called swing trading because the trader intends to catch certain ‘swings’.

Incorporate these trading tips into your financial journey and you will be able to beat the funded account challenge and win the big prize.

How to Maintain a Funded Account

Once you beat the challenge, it’s time to get funded. You will no longer have to prove your skill by hitting a profit target. Instead, you will be given your prize money – the funded account you signed up for. No questions asked – it’s time to start trading.

Stocks, forex (currency trading), cryptocurrency, indices, commodities like gold and oil – all asset classes will be available for you to buy and sell. The prize money is now in your account and you will have exposure to any market you like.

Keep in mind that the broker will have a daily drawdown rule and an overall drawdown rule. And the key thing to maintain your funded account is to not go over those two drawdown rules. In other words, your prop firm might require you to keep your losses below 5% on any given day – a max daily loss of 5%. If you lose more than 5% on any given day, you will have your funded trading account closed. Moreover, you should also make sure to know what is the overall drawdown that is allowed. Some will have a 15% overall loss as a requirement so be aware of that, too.

These two rules are important for the prop firm to defend its capital from outsized risks such as a complete wipeout or a huge loss. And it’s also a good risk management tool for you because you won’t be taking on too much risk on your trades.

Pros and Cons of a Funded Account

A funded account, the one you get after you beat the challenge, comes with benefits but also has some downsides. You need to consider those regardless of your account size or whether you are into forex trading, futures trading, options trading, the stock market, etc. Let’s examine them so you would know what to expect once you get there.

Pros of a Funded Account

• Trade with ample capital – prop firms can hand out as much as $200,000 of real money. This is considered a lofty amount of capital for most retail traders. With this funding, the market is open and every opportunity could be pursued.
• No risk of loss transfer – a huge benefit of the funded program is that there is virtually no risk of losing more than you have invested. Further, you don’t owe anything to your broker in case you lose money from the funded account.
• Built-in risk controls – the above is possible thanks to the built-in defense mechanisms. Brokers will generally not allow the trader to lose more than 5% (or so) of the capital on any given day. In addition, there is also a maximum overall loss that floats around 15%. If any of those gets hit, it’s game over and the funded account is taken away.
• Can withdraw regularly – weekly payouts from your profits are a big plus since you can trade as much as you want and conveniently withdraw your share of the profits every week.
• Trade in diverse markets – trading with a funded account means trading anywhere in the global financial markets. You can go into stocks, forex, gold, oil, cryptocurrency, and indices. With as much as $200,000, you can be anywhere all the time.
• Use of leverage – Even though the capital is rather large, you can still employ leverage when you trade. Opening positions can be done with as much as 1:100 leverage – an amount that will shoot your returns to the moon. But be careful – make sure you won’t fall prey to the daily and overall drawdown.

Cons of a Funded Account

• Max daily loss might be narrow – some prop firms might put a max daily loss that will be too tight, preventing the trader from expanding their trading activity to allow for a wider loss. Usually, a 5% max daily drawdown is considered appropriate.
• Profit splits might be unfair – sharing your profits with the prop firm varies in ratio. Some prop firms will ask for as much as half of your profits. These are usually to be avoided. And some will actually follow the well-known hedge fund rule of 80/20 – you get to keep 80%, while the broker gets a 20% cut. This model is considered generous and recommended.
• Traders might feel rushed – since traders delivered commendable performance during their challenge phase, they might transfer the feeling of being rushed into the actual funding phase. This, however, is a psychological moment that will likely fade as soon as you get accustomed to the new funded account.

How to Choose the Best Prop Firm

There are many prop trading firms out there. And choosing the best Prop Firm may seem complicated. Until you realize that you can narrow down your search. Essentially, once you get a sense of what prop trading is and where you fit in the spectrum, it should be a fairly easy decision.

The right choice comes down to your own preferences and what you consider an appropriate prop trading platform. Usually, the ones that offer the best trading conditions are leading the pack. Not many traders would like to have a 50% cut of their profits. Naturally, they’ll go for the ones that offer a 70% or even an 80% share of the profit.

In short, the variables that you need to take into consideration include:

• Profit split/profit share
• Evaluation process
• Available markets
• Available leverage
• Available customer support
• Reliable trading platform
• Daily drawdown limits
• Overall drawdown limits
• Is the registration fee refundable

What is the Best Funded Trader Program

The best funded trader program largely depends on your own trading style and expectations. No matter if you are a beginner or an advanced trader, your brokerage account will receive the funding you signed up for. If you are a risk taker at heart, for example, you will naturally be looking for more leverage and a higher amount of funding.

On the other hand, if you are more on the defensive side of trading, you might opt for a funded trading program that is less risky and get a smaller amount of funding. That way, your trades won’t be too grand and you will be able to take a gradual approach to growing your funds without taking up too much risk.

In addition, the best funded trader program is also tied to the characteristics of the trading platform of your prop firm. If the trading platform is feature-rich, comprehensive, responsive, and up-to-date on the tech front, you will likely have a smooth trading experience. Count in the efficiency and reliability of the customer support since you will have questions down the road.

Conclusion

At the end of the day, the goal of the funded trading account is for you to make money and get more knowledgeable and experienced. All those things depend largely on you and your ability to trade. Before all else, think of the trading funded account as a complement to your trading skills.

A harsh truth for some may be that if they have failed multiple times to turn a profit, they will likely flop on their funded account journey. On the positive side, however, they won’t have to cover any losses from their pocket since the funded account doesn’t ask you for money in case your trading nosedives.

To this end, keep in mind that you must rely on a trading strategy if you want to succeed in the funded account challenge. Moreover, make sure to take the strategy with you when you grow your funded account.