What is a prop firm?
A prop firm (proprietary trading firm) is a company that gives traders access to its capital, or to a simulated account tied to its capital, in exchange for a share of the profits. In the retail "funded trader" model, you usually pay a fee to take an evaluation, trade a demo account under strict risk rules, and if you pass you receive a funded account where you keep a percentage of the profits you make. The firm sets the rules, the account size and the payout terms.
The appeal is clear: you can trade a larger account than you could fund yourself, and your maximum loss on an evaluation is usually limited to the fee. The trade-off is that you must follow tight rules, and many traders fail the evaluation.
Traditional prop firms vs retail funded-trader firms
The term covers two quite different businesses:
- Traditional prop trading firms trade the firm's own money, often with in-house traders who are hired, trained and sometimes required to contribute capital. They may focus on market making, arbitrage or discretionary trading.
- Retail funded-trader firms, sometimes called online prop firms, sell evaluations to the public. Traders who pass trade an account under the firm's rules and receive a profit split. In many cases the "funded" account is itself a simulated account, and the firm pays out based on its performance.
Most people searching for prop firms today mean the second type, so the rest of this guide focuses on it.
How a prop firm challenge works
Although details differ between firms, the typical structure looks like this:
- Buy an evaluation. You choose an account size and pay a fee. Firms often offer one-step, two-step or instant-funding options.
- Hit a profit target. You must reach a set percentage gain without breaking any rule.
- Respect the loss limits. Most firms enforce a maximum total drawdown, and many also have a daily loss limit. Some use a fixed floor and others use a trailing one. Our guide to trailing vs static drawdown explains the difference.
- Follow any other rules. These can include a minimum number of trading days, consistency rules, news trading restrictions, weekend holding limits and limits on position size.
- Get funded and request payouts. Once funded, you trade under similar risk rules and request payouts according to the firm's schedule and profit split.
Rules, prices and profit splits vary widely and change often. Check current terms on each firm's website and compare them in our prop firm comparison, or read individual reviews such as our FTMO review.
A worked example
The numbers below are hypothetical and chosen only to show how the maths works. They are not the rules of any specific firm.
Imagine a $100,000 evaluation with a 10% profit target, a 5% daily loss limit and a 10% maximum loss measured from the starting balance.
- Profit target: 10% of $100,000 = $10,000, so you need to reach $110,000.
- Daily loss limit: 5% of $100,000 = $5,000 in a single day.
- Maximum loss: 10% of $100,000 = $10,000, so the account fails if equity falls to $90,000.
If you risk 0.5% of the starting balance per trade, each loss costs $500. You could take 10 consecutive losses before hitting the daily limit ($500 x 10 = $5,000), and 20 before hitting the maximum loss. At 2% per trade, each loss costs $2,000, and just three losses in one day ($6,000) would breach the daily limit. This is why small, fixed risk per trade matters so much in an evaluation. You can test your own numbers with the position size calculator.
Now suppose you pass and, once funded, make $5,000 in a payout period with a hypothetical 80% profit split. Your share would be 80% of $5,000 = $4,000, and the firm would keep $1,000.
Prop firm vs trading your own account
| Prop firm | Own broker account | |
|---|---|---|
| Capital needed | Evaluation fee | Your full account deposit |
| Maximum loss | Usually the fee (and any resets) | Your deposit, and in some cases more |
| Rules | Strict, set by the firm | Set by you, within broker limits |
| Profits | Shared via a profit split | Keep 100%, minus costs |
| Main risk | Failing rules, firm changing terms or closing | Losing your own capital |
For a deeper comparison, see our article on prop firm vs broker.
Pros and cons of prop firms
Advantages
- Access to a larger account size than most beginners could fund.
- Defined downside: the fee is usually the most you can lose on an evaluation.
- Hard risk limits that force disciplined position sizing.
Disadvantages
- Most evaluations are failed, so fees can add up across repeated attempts.
- Rules such as daily loss limits and trailing drawdowns can end an account during normal losing streaks.
- The industry is largely unregulated as a product, and firms can change rules, restrict payouts or shut down.
- Time pressure and profit targets can push traders to oversize.
How to choose a prop firm
Look at more than headline account size and profit split. Check how drawdown is calculated, whether there is a daily loss limit, which platforms and instruments are allowed, how payouts work in practice, how long the firm has been operating, and what independent traders report about payouts. Our list of top prop firms is a starting point, and our guide on how to pass a prop firm challenge covers preparation.
Trading involves substantial risk of loss. Prop firm fees are typically non-refundable if you fail an evaluation, and past payouts do not guarantee future ones. Read our full risk disclaimer and advertiser disclosure.