Are prop firms the best way to trade?

I would like to shed some light to what seems to be the new trend in the trading industry; Prop firms. The idea behind such firms is to provide a profitable trader with more capital, to trade and share the profits with the firm in question. Sounds awesome, doesn’t it? Yes it does, but trust me it does not feel awesome to trade for a prop firm, especially during the evaluation stage.
At first glance, Prop firms seem to provide friendly trading conditions:
Just to name a few:

  • You get a bigger account for a small deposit
  • You are not responsible for the losses,
  • you get a higher percentage profit share (some to the extreme of 100% in your favor)
  • Scaling your account once you reach a certain target
    As much as these conditions are enough to attract traders (especially beginners) to hop in, there are some realities that needs to be considered first. These might also be enough to repel a trader from such firms.

A trader needs to prove that they can profitably trade. That is very fair, but most of the rules on such evaluations are just impossible.

  • Target.
    Trading alone is stressful enough, but trading with a target figure in mind? That is a surefire setup for failure. As if that is not enough, the target figure has a deadline as well. Although there are some firms who do not have deadlines in place for the target, but most have as tight as 10% in 30 calendar days. I mean that is 10% in just 20 trading days, something that professional traders make in a year.

  • Draw-down
    Fair enough, the company does not want to lose its money. But lets do some bit of math here using a draw-down of 10% which most firms have in place.
    Suppose you purchased a $100 000 account. Your drawdown is $10 000. If you reach $10K in losses, then your account is blown. You have no more money to trade with. So, your actual initial account balance is not $100K. It is $10k because that is what you are working with.

  • Draw-down : Target Ratio
    This is where things gets more interesting. From the above example of $100K account, Your draw-down is $10K with a target of $10K. This literally means you have to make $10K profit from a $10k account in 20 days. Come to think of it…100% in just 20 days. That’s first degree insanity. This means you have to risk a lot.

  • Risk management
    Well, this is not by any means a rule by any prop firm but I just want to point out how deceiving the idea of prop firms is. I have seen people being interviewed after passing the evaluations. Most of them do not even understand what they are risking per each trade. They so proudly claim to risk 1% per trade, which is not true. Yes they might be risking 1% of the deceit $100k, yet they are actually risking 10% of their actual $10k.

In conclusion, Prop firms are not so bad, but you have to understand what they are and the associated risk. If you decide to take this route in your trading journey, be prepared to be shaken off your comfort zone. I am sharing this from experience.

Please feel free to also share your thoughts, experiences and insights about such firms.

1 Like