Key Takeaways

Prop trading enables skilled FX traders to use simulated accounts provided by commercial banks and prop firms to lower financial risk. Once trading begins, the resulting profits are shared between the two parties based on performance and pre-agreed profit splits. 

• Prop traders rely on simulated accounts to minimize risk.
• Traders need to pass an evaluation/challenge before they can get access to a funded account.
• The profit split ratio ranges between 10% and 50%.
• Reputable prop trading firms provide a trading platform, ongoing support, and a community.

What Is Prop Trading? How Proprietary Trading Firms Work

Proprietary trading, or prop trading, allows you to use a simulated account provided by a firm to lower your financial risk. The firm then shares the profits based on your performance. Often, the profits shared will range from 50% and can go as high as 95%.

Please note that reputable firms will require you to pass a challenge before granting you access to a trading account!

But before we get into that, there are a few things you should understand. One of these is noting the difference between trading your own money and trading a firm’s capital.

Trading Your Own Money 

Using a personal trading account offers you full access to everything, from the trades made to the strategy and risk management practices put into place. Here, you don’t have to worry about external restrictions. But you should note that all the risks and rewards that come with it are all yours.

Trading a Firm’s Capital

Proprietary trading firms provide you with access to a significantly larger principal than you might be able to get when trading your own money. What this means is that you’ll be trading the firm’s capital when executing trades, for which you’re entitled to a share of the profits.

Expectations When Engaging in Prop Trading 

Joining a prop trading firm can be a good and rewarding career move for professional traders who understand what they’re getting into from the get-go. This means understanding what’s expected of you. For this, there are a few things you should get into your head from the very start:

1. Rules exist
2. Risk control matters
3. Discipline is required
4. Profitability varies
5. Training and education are integral to your success

What Is Prop Trading?

Prop trading occurs when a financial company chooses to profit from market-related activities instead of the razor-thin margin commissions they’d get from client trading activity. This tends to involve the trading of bonds, stocks, currencies, commodities, and other instruments.

The financial companies that engage in these activities believe they hold a competitive advantage that can enable them to earn yearly returns that surpass bond yield appreciation and index investing. 

Why prop trading firms exist

Their sole purpose for existence is to make their investors’ money from the markets. Prop trading companies get their edge from backing skilled, highly disciplined traders. They make money by giving their resources to these traders, enabling them to scale up.

The traders, in turn, benefit by gaining access to capital, while the proprietary trading company benefits from gaining access to a share of the profit. Professional traders who can follow a plan, manage risk, and stay focused, even under pressure, should consider joining such a firm.

How prop firms make money

Performance sits at the heart of every proprietary trading company’s business model. These firms rely on traders who have proven that they can consistently make money while managing their risk exposure. They, therefore, make money by taking a percentage of the profits made by such traders. 

These provide a win-win situation in cases where the trades have gone well. And to ensure that this will happen, traders are normally provided with the following:

• A funded trading account (the balance will vary from firm to firm)
• Daily or overall loss limits
• Profit splits

Read more about How Prop Trading Firms Work?

How traders benefit

Trading can be a lonely path when starting out or even when using a small personal account. As a result, many serious traders are quick to join prop trading firms as a way to level up. By doing so, they get to benefit in the following ways:

• Access to capital
• Clear structure 
• Limited personal risk
• Scaling potential

How Prop Trading Firms Work

Prop companies differ from traditional brokerage companies in that they provide you with capital to trade varied financial instruments like indices, stocks, forex futures, metals, and even crypto. But before you can get access to this funded account, you’ll have to undergo an evaluation or challenge.

During this phase, the firms will test these three things:

• Risk management
• Discipline
• Consistency

They typically use a demo account when testing the above-mentioned.

How do the prop trading firms split revenues?

If you’re among the few traders that are lucky enough to pass the evaluation/challenge and receive a funded trading account, you’ll likely become enrolled in the profit-split model. Depending on the company, you can expect the prop trading firm to make between 10 percent and 50% of all revenues.

Note that this percentage varies from firm to firm!

Prop Trading Challenges Explained

Proprietary trading companies provide seasoned traders with an opportunity to trade with a funded trading account, allowing them to level up and make more money. For them to confirm that only the best will get access to these trading accounts, eligible traders must go through a “prop firm challenge.”

Click here to read through our detailed guide on Prop Trading Challenges Explained!

Why challenges exist

As discussed in the article, Proprietary Trading Explained, prop firms’ challenges are structured assessments that are designed to evaluate your ability as a trader to generate profits. You must show that you can make money while adhering to the risk parameters set by the prop trading firms.

In most cases, the firm will provide you with a simulated account from which you’ll be expected to achieve predetermined profit targets. 

What firms are testing (not profits)?

These tests aren’t always about testing your profit-generating capabilities. The firms offer them to check whether you’re consistent, disciplined, and able to follow the laid-down rules. You need to prove that you can trade without breaching the maximum drawdown limits. 

Discipline and risk control are needed to achieve this, as it’s the only way to guarantee that you’ll remain profitable. On completing this challenge, prop trading firms will provide you with a funded account, thus enabling you to trade with their capital and receive a share of the profits made.

A Funded Trader Program allows you to trade with Live Capital and is the next logical step after trading with a demo account. Depending on your abilities, you can get to trade with live capital ranging from $7,500 to $60,000. And this is not forgetting the opportunity to scale up to $2 million!

Funding Trader Program

Trade with Audacity Capital

Risk Rules in Prop Trading

Your ability to control risk in prop trading is the single most important skill you ought to develop for consistent profitability. While at it, it will be important to understand the following three principles related to risk management:

• Forex markets are unpredictable, and there’s no single system in existence that can guarantee 100% accuracy. 
• Profitable traders are those who have learned the art of capital preservation and who respect trade sizing and loss limits.
• A high-win strategy can blow up when not backed by proper risk management. 

Before we look at the risk rules in prop trading, I’d like to take you through what I learned when starting out as a prop trader, in the hope that you might be able to learn something from my experiences.

You see, when I began trading using my very first prop firm challenge, I found myself failing; not because I had a bad strategy, but because I couldn’t control my emotions when a trade position went wrong.

And as I look back at what I went through, I can be honest with myself and say that I believe I could have done better. So, what am I trying to say?

If you have ever felt frustration creep in after losing a trade or found yourself executing trades to recoup your losses, you’re not alone!

As a prop trader, emotional control matters more than any other strategy you may have in place. And based on past experiences, traders don’t fail because they don’t know what to do.

They fail because they let their emotions take over, thus pushing them over their daily loss and max drawdown limits. But this doesn’t need to be you.

During my evaluation phase, I learned that the hardest moments were three-fold:

Accepting slow progress to build consistency instead of trying to force a trade.

Resisting the urge to engage in revenge trading after a particularly big loss.

Stopping all trades after hitting my daily loss limit.

Having said that, I believe the information contained below can help make your experience with prop firm challenges better than they were for me.

Daily drawdown

Daily drawdown is also known as the daily loss limit and refers to the maximum loss that a trader can make in any trading day. Surpassing this limit means the prop firm will have to limit your access to the funded trading account.

Your daily loss limit can either be equity-based or balance-based. In the former, it means your drawdown limit will be determined by your opening balance, while a combination of the floating profit/loss and the starting balance will determine the same in an equity-based drawdown. 

Maximum drawdown

Maximum drawdown is also called total drawdown and is used to measure the largest loss permissible from the peak of your funded trading account over its lifetime. As is the case with the daily drawdown, breaching the maximum drawdown will lead to the loss of your account. 

Depending on the rules set by the prop trading firms, the maximum drawdown can either be:

• Static/fixed: These are set at the funded trading account start and are usually relative to the starting balance. 
• Trailing/dynamic: Your drawdowns will adjust with the equity growth of your trading account. Here, you should note that what will change is the dollar amount, with the percentages remaining the same. 

Taking time to learn about the prop firm’s Daily vs Max Drawdown limits will ensure that you continue to trade within the set limits while maintaining consistent risk management. 

Daily loss limits

The daily loss limit in prop trading refers to the maximum amount your funded trading account can afford to lose on a single trading day. Your prop firm will set it at a percentage, say 7%, of the equity held at the end of the previous trading day. 

Unlike other limits, the daily loss limit doesn’t get adjusted intraday. What this means is that if your account were to reach a new high watermark from your past profitable positions, this won’t affect the daily loss limit set for that day.

Click here to read through How Traders Get Funded

Why risk rules matter more than profits

Prop Trading Risk Rules matter more than profits because they help provide the structure needed for sustainable growth, protect against losses, and ensure continued profitability. While profits are commonly used to measure success, having a risk management plan can help dictate future viability. 

Some of the top reasons why prop firms prioritize rules over profits are:

• Operational stability
• Ensuring long-term survival
• Controlling internal and external factors
• Continued profitability
• Preventing catastrophic losses 

How Audacity Capital Fits In

Audacity Capital is a prop trading firm that has been operational since 2012. Over the years, the Audacity Capital Rules Explained / Funded Trader Program has helped thousands of traders scale up and boost their earning potential.

If you’re just getting started with professional trading, you may be wondering how this prop firm fits in with your long-term goals. This is how:

1. Longest-standing proprietary trading firm: With over ten years in the industry, Audacity Capital offers the kind of stability and assurance needed to continue trading. 
2. One of the firms still using MT5: MT5 is a platform that most traders are well-versed in. And as other companies move to emerging technologies, some traders wish to stick to what they already know and love. If this is you, rest assured that Audacity Capital has your trading needs covered.
3. Competitive capital allocation: Every trader who qualifies for a funded trading account gets access to a range of accounts that help empower their careers. It has a profit-sharing agreement of up to 80%, including an aggressive scaling program for those who are consistently profitable.
4. Proven track record: Its 10+ years in the industry have seen it get rated by thousands of clients. The fact that it has a proven track record makes it a reliable and trustworthy trading partner. 
5. Stability when you need it: Working with an experienced and proven prop firm offers a level of stability that’s unavailable elsewhere. It provides an assurance that the business will be there tomorrow, and thus never have to worry about it going offline without notice. 

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