How Traders Get Funded

Key Highlights

Capital is the one thing that holds back many traders who are looking to scale up. A funded trading account can help eliminate this worry. But for you to get funded, you must be able to prove that you can stay consistently profitable and be able to manage risk.

Evaluation: It’s your chance to prove that you possess the skills needed to trade at a pro level, while hitting the profit targets.
Verification: The financial company may require you to showcase your risk management plan.
Funding: This stage gets you access to the funding you need to trade. However, you’ll need to stick to the set rules to prevent account termination.

One of the most commonly Googled questions by individuals looking to get into prop trading is, “how traders get funded.” What you need to know is that prop firms fund traders after ascertaining their ability to manage risk and generate profits following laid-down rules.

In all cases, the trades must first go through a paid evaluation challenge before they can get funded. The funded model enables traders to use the capital allocated by a prop firm via a demo account. Please note that the conditions in the demo account mirror those of a Live one.

Read more about What is Prop Trading?

The benefit to you as a trader is that you don’t have to risk your personal savings. Read on to learn more about the funding process for prop trading.

Breakdown of the Funding Process

Evaluation

The evaluation phase is among the most difficult phases as it’s specifically designed to filter out undisciplined or unskilled traders. It’s also a paid stage, requiring traders who may want to get funded to raise a certain amount.

Lean more about How Prop trading Firm Works?

Its goal: Each trader is required to hit a certain target. This could be 5% to 10% of your starting capital. Make sure to take time to understand risk rules before starting a challenge.
Trading Rules: How well can you adhere to strict risk management? The prop firm will want to test your ability to stick to maximum daily loss limits and maximum total drawdown limits.
Constraints: Every prop firm will have different time limits. For example, there are those who will place a 30-day time limit to pass the evaluation, while others won’t have any time constraints.

Verification

The second phase, or the consistency check, is a bit more relaxed than the initial stage. Here, the prop firm will be attempting to confirm that you do, in fact, possess skill, and that your passing of the first phase wasn’t by sheer luck.

Its Goal: It shares the same goal as the first phase above, with the only difference being that the profit target here is lower.
Purpose: It’s designed to confirm that the prop trader has a consistent trading habit, discipline, and well-thought-out risk management plan.

Please note that some firms have recently moved to the one-step challenge, thus eliminating this stage. Without the verification stage, it means that what you’ll get is instant funding. And while this may seem interesting, be cautious, as it could also come with stricter restrictions.

Funded Account

Once you’ve completed the evaluation and verification stages, all that remains is to get funded. And this is how this step works:

Capital: The prop trading company will provide you with access to a funded trading account having a capital allocation of between $10,000 and $100,000.

Trading: It’s now time to prove your abilities. Use the capital made available by the prop firm to start generating profits. Make sure to observe the Daily vs Max Drawdown limits.

Key Highlights for success

To succeed in prop trading, you’ll need to have a good risk management plan. Most participants fail because they lack a trading strategy.
The challenge fees are paid beforehand and are, in many cases, not refundable. The rules may vary, as some firms may offer a refund to participants who pass the evaluation.
Violating the drawdown limits will lead to account suspension or termination.

Common reasons traders fail

Many traders fail prop firm evaluations due to emotional decision-making, poor risk management, and violation of drawdown rules. There are also those who fail because of overtrading and failing to adhere to a single trading plan.

As someone who has spent the better part of his adult life engrossed in prop trading, I will tell you for a fact that the FX market is by far the largest financial market worldwide.

It’s a market that sees more than $7.5 trillion being traded each day. But while there are many FX traders, experience has taught me that only a handful of them get to become profitable.

What’s more, statistics show that close to 90% of individuals who get into trading end up losing their money. However, you shouldn’t take this to mean that the industry is all gloom!

Early on in my career, I learned that traders fail for all kinds of reasons. Some of these are the same reasons that traders trading in other asset classes fail.

For example, there are those who fail because they chose to overleverage their capital. There are also those who fail because they took many risks without a concrete entry and exit plan.

To ensure that you don’t become a part of this troublesome statistic, I have gone to great lengths to curate a list of the reasons why many beginner traders fail at prop trading.

Below is a look at some of them. Enjoy!

Related Article Prop Trading Business Model

Top reasons for failing

In prop trading, survival tends to be more critical than speed. But despite knowing this, many traders fail as they attempt to hit their profit targets too fast. Below is a look at the top reasons for failure:

Underestimating the level of difficulty: It happens when a trader enters a challenge without proper mental preparation. This is a problem I have seen too many times with traders who began trading without a demo account. Jumping straight into the live markets will expose you to early losses, which may lead to discouragement.
Overtrading: Boredom and impatience are the leading causes of overtrading, which are known to contribute to low-quality trades. If you’re always on the lookout for the next asset that will blowup, this will lead to emotional trading. Avoid this by trading less to guarantee higher quality trades.
Poor Risk Management: You need to have a detailed risk management plan. Without it, you may find yourself risking too much on each trade, leading to a breach of the limits. The solution to this is to only trade using assets that you can afford to lose.
Emotional Trading: Engaging in impulsive decision-making, fear-based trading, and revenge trading after a loss will lead to a loss of capital. Remember what we said about overtrading? Well, focusing too much on money will affect your decision-making process. As a professional trader, your focus should be on your development, instead of the trophy, which in this case is the profits.
Not Adapting to the Conditions of a Live Account: The primary difference between a demo account and a funded one lies in the mental pressure that each brings. Some traders will do well when using a demo account, but find themselves freezing when on the master account. The pressure when trading in a Live account comes from knowing that you’re using another person’s capital to trade.
Misunderstanding payout rules: Prop trading companies have stringent rules that must be followed when trading. With these rules, the firms will also have in place a unique scaling method, payout system, and predefined profit target. Make sure you read the fine print before you commence trading.
Having Unrealistic Expectations: Traders who are just starting may have unrealistic expectations about prop trading. Many are those who get into this field believing it to be a get-rich-quick scheme. Those with this mentality fail to realize the amount of dedication that’s required to succeed as a prop trader.

Funded Trader Program

Start Funded Trading

What firms look for (discipline, consistency)

Discipline and consistency are the two leading factors that firms look for when recruiting prop traders. This is because a disciplined trader can maintain consistent profitability by adhering to strict risk management rules.

Such traders are well placed to prioritize capital preservation, even when under the threat of psychological and mental pressure. Below is a look at the top traits prop firms seek:

Discipline and Adherence to Rules: Every prop trader must be able to adhere to the daily drawdown limits, avoid overtrading, and be able to follow a predefined trading plan.
Risk Management: Risk management revolves around the ability to limit losses. A good trader does not risk more than 1% of their available capital on a single trade.
Consistency Over Big Wins: Established prop trading companies prefer partnering with traders who can make steady, incremental gains, as opposed to big, one-time wins.
Clear Trading Strategies: Prop traders should be able to prove that they have well-defined trading strategies that include detailed entry and exit rules.

Prop trading companies use evaluations and challenges to seek out traders who possess the traits mentioned above. To boost your chances of success and of getting a funded account, make sure to first understand risk rules before starting a challenge!

FAQ

It’s a simulated account offered by a prop firm allowing you to trade with its capital instead of risking your money.

You need to go through three stages: evaluation, verification, and funding. Once you have showcased your skills, the firm then allocates you a certain amount to trade.

Yes! One of these rules is that your single day trading activities shouldn’t exceed the consistency rule percentage.