Prop firm
Also called proprietary trading firm, prop trading firm, prop shop, funded trader program, funded account
A prop firm (proprietary trading firm) lets you trade the firm's capital instead of your own and keeps a share of any profit. In the retail model you pay a fee and must pass a rule-based evaluation before you get a funded account (often a simulated account).
The account size on the screen is not money you can lose. Your real exposure is the fee you pay, and your real room to trade is the firm's loss limit, which is far smaller than the headline balance.
How a prop firm account works, from fee to payout
Most retail prop firms follow the same sequence, whether the market is forex, futures or stocks: you pay a one-off fee for an evaluation (also called a challenge) on a test account of fixed size, trade it to a profit target inside the loss rules, move to a funded account if you pass, then request payouts and keep your profit split, the percentage of profit the firm pays you.
Three types of prop firm and what each costs you
A prop firm is not a broker, because you deposit no trading capital with it. Many evaluation accounts, and often funded ones too, run on simulated prices, and the firm pays your split from its own funds.
| Model | What you pay first | How you get capital | Main catch |
|---|---|---|---|
| Evaluation (challenge) | A fee per attempt, plus any reset or repeat fees | Pass a profit target inside the loss rules | A rule breach ends the attempt and the fee is spent |
| Instant funding | A larger fee | Funded from the first day | Tighter loss limits or a lower split |
| Traditional prop desk | Usually no fee, sometimes your own risk deposit | Hired or interviewed as a trader | Hard to get in, often on site, and losses can come out of your risk deposit |
Instant funding suits a trader who already has a steady method and does not want to wait through a test. The tighter limits matter more than the skipped test, because every trade has to fit inside that smaller room for as long as you hold the account.
Your real cushion is the drawdown, not the balance
Two loss rules decide almost everything. The daily loss limit is the most you may lose in one day. The maximum drawdown is the most the account may fall in total before the firm closes it.
The figures below are an illustrative example, not any firm's real terms. Take a $100,000 challenge with a $500 fee, a 10% profit target, a 5% daily loss limit, a 10% maximum drawdown and an 80% profit split.
The common misread is "I have $100,000". The account closes at $90,000, so your real cushion is $10,000. Risking 1% of the balance is $1,000 per trade, which is 10% of that cushion. The fifth loss in one day hits the daily limit.
How the firm measures the daily limit decides where that line sits after day one. Some firms fix it from the starting balance, so it stays at $95,000 for the life of the account. Others reset it each day from the balance, or from the higher of balance and equity, at the daily reset time. After a +$2,000 day that closes at $102,000, a reset limit moves up to $97,000 the next day ($96,900 if the firm takes 5% of the new $102,000), so you have about $5,000 of room from the new level, not $7,000 down to $95,000. Open losses count at many firms: a trade still running $3,000 underwater uses $3,000 of the limit even though nothing has closed.
A trailing drawdown is harder to read, because the closing level follows your highest equity (balance plus open profit or loss) upward. If equity peaks at $104,000, the closing level moves from $90,000 to $94,000. A fall back to $100,000 has then used $4,000 of the room, although the account shows no loss from the start. Some firms trail on closed balance instead of equity.
The drawing below shows the same account as lines on an equity curve. Equity dips to $96,000 on day one, close to the daily line, then recovers, peaks at $104,000 and pulls back before reaching the target.
Size each trade from the daily loss limit
Don't size from the $100,000 balance. Size from the daily limit: decide how many losses in a row should use it up, then divide. Here the choice is ten, so the tenth loss hits the limit. The stop is 25 pips on a USD-quoted pair where one standard lot is worth $10 per pip.
Leave a buffer for spread, commission and slippage: for example, size for ten losses and stop for the day after eight. At $500 per trade it takes 20 straight losses to reach the maximum drawdown.
The rules are enforced on the firm's own dashboard, not on your trading platform. The order window will not stop you from placing a trade that breaks them.
What a funded payout leaves after the split and the fee
If you later withdraw $4,000 of profit on the funded account, your share is $4,000 × 80% = $3,200. $3,200 minus the $500 fee is $2,700, and each failed attempt before it costs another $500.
Checks before you pay for a challenge
- Drawdown type. A static limit stays at one level. A trailing limit follows your highest equity upward, so open profit you give back can count as loss. Ask whether it trails on equity or on closed balance.
- Daily reset. Find out the clock time the day resets.
- Costs. Compare the spread, commission and swap on the firm's account with what your strategy assumes.
- Restricted trading. Read the rules on news releases, weekend holding and minimum trading days.
- Payout terms. Check the first payout date, the minimum amount and any consistency rule that caps one day's share of profit.
- Fee as the stake. Budget for several attempts, not one. If that total is money you cannot afford to lose, pick a smaller account size.
FAQ
Are prop firms regulated?
Most retail evaluation firms are not supervised the way brokers are. Your payout therefore depends on the firm's contract and on the firm staying solvent, so read the terms before you pay.
Can I run an Expert Advisor on a prop firm account?
It depends on the firm. Some allow automated trading freely, some ban specific styles such as copying another trader's signals or high-frequency methods. Get the answer in writing before you start.
Do I get the challenge fee back after passing?
Some firms refund it with an early payout and others never do. Treat the fee as spent unless the terms state a refund and its condition.