If you have forex trading skills, but not a lot of capital, one solution you may hear is to consider becoming a prop firm trader. You may have no idea what a prop firm is though, or why you would want to join one. If so, you are in the right place. In this forex prop firm 101 guide, we are going to go over all you need to know about prop firm basics.
What is a Forex Prop Firm?
The phrase “prop firm” is short for “proprietary trading firm.” It is a firm that partners with individual traders. The prop firm allocates a certain amount of capital to each trader. The traders use that capital to place trades. If the trades are profitable, the firm makes money. It then shares a percentage of the profit from each trade with the trader who made that trade.
- The prop firm benefits by making use of the skills of individual traders to bring in profits. Working with a variety of traders makes it easy for the firm to diversify its methods.
- The traders benefit by being given the opportunity to control a much larger amount of market capital than they may possess in their own individual trading accounts.
Why Traders Join Prop Firms
Most traders who join prop firms do so because they are facing financial barriers to beginning their trading careers with their individual accounts.
Let’s say you are trying to start out with an account with $1,000 in it. A lot of forex brokers will let you get started with even less than that. So, you may be doing better than someone with $100 or $10. But how much can you risk per trade with $1,000? If you are only risking 2% per trade, as is generally considered responsible money management, your initial trades will be only $20.
Think how long it will take you to grow a $1,000 individual trading account with $20 trades.
You have three options at this point. You can give up, you can accept that growth will be incredibly slow, or you can look for a way to control more capital.
Some traders may be tempted to trade a much larger percentage of their accounts, or even trade on leverage, in their individual accounts. This is generally a recipe for blowing an account. Trading doesn’t suddenly get easier just because you have decided to risk 10% instead of 2%. Your system will perform the same way it always has. If you hit a losing streak, you may be shocked by how rapid and dramatic your drawdown is.
An alternative option is to join a prop firm. As a prop firm trader, you can control a chunk of the prop firm’s capital that adds up to much more than you have in your personal trading account. It might be $50,000, or $100,000, or some similar amount. You can then risk 2% of that amount on each trade.
There are a couple of reasons why this approach beats trading with leverage in a personal account.
- If you run into a losing streak, you are limiting your drawdown as a percentage of the prop firm’s funds. If you risk just 2%, that is how much you will lose on any given trade. So, you are more likely to weather a losing streak long enough to come back from it instead of blowing the firm’s account.
- You are not responsible for covering your losses with a prop firm’s accounts in the majority of situations. The prop firm may close the account if the drawdown is significant. But you will not lose any money beyond whatever challenge fee you paid.
So, you are taking less of a risk by trading with a prop firm’s funds than you would by trading on leverage in your own account.
After you have accumulated profits as a prop firm trader for a while, you can withdraw them and transfer them to your personal account. You can then switch to trading with that if you want.
How You Become a Forex Prop Firm Trader
Now you know why it is worth your time to become a prop firm trader. It is one of the best solutions for traders with small personal accounts. But how do you become a forex prop firm trader?
Prop firms only accept traders they believe will help them profit consistently. That means that they need a way to assess your skills before they let you join.
To that end, they offer challenges. You apply for a prop firm account, and take the challenge assessment. This involves trading live to prove your skills meet their requirements.
If you pass the challenge, then they will offer you a funded account, and you are now officially a forex prop firm trader. If you fail the challenge, then you will need to try again if you want to get in. Note that some firms do offer you a way around this, which is to pay a fee for what is called an “instant funded account.”
We know that you probably have many more questions about prop firm trading. In our upcoming posts, we will be teaching you about the different types of prop firm accounts, what you need to know about prop firm challenges, how to decide which prop firms to join, and more.
