Prop Trading Firms – What are they?

futures trading platform

Over the past few years, prop trading firms have been popping up around the internet and have been increasing in popularity. Since they are fairly new, there are many people who don’t understand what they are and how they work…

Futures prop trading firms, such as Apex Trader Funding are companies that allow you use their capital to trade in the stock market. The majority of these companies are futures prop firms and only allow clients to trade in futures (commodities) although there are some who allow trading Forex.

How do Prop Trading Firms Work?

Most prop firms will require you to sign up and request an account with a dollar value anywhere from $25,000 to over $300,000. Not so fast though… these companies are not just going to hand over their money for you to trade. The way it works is that potential traders, must pay a monthly fee and this will get them access to a trading combine. This combine is essentially a test to see if you can manage risk and make money in the futures market.

These prop firms have a set of rules typically including:

  1. The number of futures contracts you can trade.
  2. The max daily/weekly drawn down (how much you can lose).
  3. Times when you can or can not trade.
  4. Prove that you can manage risk.
  5. A “profit target” that must be reached in order to get a funded account.

If any of these rules are broken or not achieved, you must pay a “reset” fee that allows you to try again. This “reset” fee ranges from $80 to $100.

I’ve Passed the Combine… Now what?

If you successfully reach your profit target, typically you now qualify for a funded account. Each company does this differently but in most cases, you are now allowed to trade with the company’s money. At this point, any profit you make is typically treated as follows:

  1. The first $5000 is yours 100%. This varies by company and can be up to $10,000.
  2. After the first target is met, any additional profit that is withdrawn is typically 80/20 for the trader. This means if you withdraw $1000, you will get $800 and the prop trading firm will keep $200 as their fee.

At this time, you still have rules you need to follow that govern when you can and can’t trade as well as drawdowns and contract limits. If you break any rule, you typically will be kicked out of the program and will need to pass the combine to become funded again.

Are Prop Trading Firms for me?

It depends… Are you familiar with trading futures? Are you profitable trading futures? Can you follow rules?

If I had to guess, I would say that the majority of the profits these companies make are based on the monthly fees and resets paid by users who are trying to qualify for a funded account. I don’t have any proof of this, but from what I can tell, a large majority of those who try to qualify, never actually do. In the mean time, these potential traders have paid for multiple months and multiple resets.

If you can answer “Yes” to these questions, you may be a good candidate as a prop trader:

  1. Attention to detail – Are you able to follow each rule and limit your emotions while trading?
  2. Stop limits – Are you able to stop trading for the day after you have reached your daily target or stop loss limits?
  3. Profitable – Do you have a system that is proven profitable over time?
  4. Access to capital – Are you a solid trader who simply needs more access to capital so that you can trade more contracts in order to increase your profits?

If you can not answer “Yes” to all of the questions above, I suggest you start with paper trading (sim trading) but follow the rules laid out in the combine. This can end up saving you a lot of money in monthly and reset fees while you come up with a trading plan that you can be successful with.

Good luck!