Traders Mentor – Trading With Prop Firms

Prop Firm Trading can be an excellent way to get yourself started with trading futures.  As with anything there are both pros and cons to using them.

PROS:

Cost effective entry into futures: Depending on the firm you choose, for a small monthly fee you can get access to charting/trading platforms and ultimately end up with a funded account.  The small monthly fee gives you access to platforms and real time charts as you learn and practice.  As you learn and practice your strategy, you are also participating in their challenges that can lead to funding of 25-300k, depending on the firm and the level you choose. For example, TopStep has a relatively inexpensive $50/month plan that gives you access to real time charts and a 50k funded account once you start trading profitably with some consistency.

Rules: Prop firms will have rules to follow as you trade your strategy. Rules can be beneficial as they are usually focused on capital preservation that can instill good trading habits.

Funding: The ultimate goal of trading with a Prop Firm is to get access to a funded account.  If you can pass their challenge then usually the monthly fee is waived.  Once you start trading with a funded account, then profits made are paid out to you in real dollars, even if you are still at a simulation account level.

Multiple Accounts & Firms: Once you are trading profitably, you can usually have more than one account. The benefit of this is copy trading multiple accounts at once, potentially multiplying your gains.  For example, if you had five funded accounts and you were to copy trade with them all, you would only need to trade $200 a day in one account, giving you $1000 for the day across all accounts.

Not Your Capital: You don’t need $1000+ to open an account, and any money you loose isn’t yours. This is especially beneficial when you are first starting out, learning and trying to build your consistency. Rather than risking your own capital, you are risking the prop firms. Usually the firms will keep you in a simulated environment until you prove consistent profitability but they pay you out in real dollars regardless. Eventually they will move you to a real live funded account.

CONS:

Rules: All prop firms will have rules that you must follow in order to pass their challenges. These can be restrictive to your trading strategy, make it harder to trade profitably, and lead to “blown accounts” and having to start the process over.

 Withdraws: The amount of profits available to withdraw can be restricted for a period of time as well as the amount.

Shady Firms: Not all firms are equal and recently there has been a surge of firms shutting down (primarily in the forex space). Look for firms that have been around a while and have a good history of paying out. Consider Futures over Forex.

Pyramid Schemes: Until you have reached the Full Live Funding phase, prop firms are paying you out with the fees of other users. If they are unable to sustain their model then they will ultimately shut down.

Deceptive Funding Levels: While the monthly payment may say it gives you access to a 50K+ account, in reality the account is only as big as the allowed drawdown. So while you may believe that you have 50K to play with (for example) the account will have a max drawdown level that is around 2-3k. Once reached you have “blown” the account and have to start over. So effectively you only have that 2-3k in losses that you are allowed, not the 50K that is advertised.

Do your homework! Not all firms are equal and each have their own rules that you have to follow in order to reach payouts. While they can be restrictive to your trading style, they also can be a very cost effective way to learn and start trading. Once you get going, consider using multiple firms so that you are not putting all your eggs into one basket. I would also recommend eventually opening a real live brokerage account, funded with your payouts from Prop Firms, so that you are not relying on any firms and their solvency. Once you have started receiving payouts from firms, then you are a somewhat consistently profitable trader and the risk is lower of loosing your own money, as opposed to when you first start out.

Any questions or want to hear more about the Prop Firm space? Feel free to shoot me a note at [email protected] and I will do my best to point you in the right direction.