By Your Trading Mentor,

Trading Angel

As a trading mentor I’m always talking to new or aspiring traders who’s goal in life is to be funded by a prop firm, and while this is a great goal to have and is the right path for many forex traders, there are some disadvantages which I’m not really hearing many other trading mentors talking about. When I signed up to trading mentorship I was asked if I was there because I needed help passing a prop firm challenge to which I honestly answered no, I was just looking to become a better trader.

So let’s start at the very beginning, what is prop firm and a funded trader programme and who are they great for? And after we have established why they are great and the obvious reasons why traders want to be part of one, then we can move onto the small print which many trading mentors aren’t talking about.

A proprietary firm, otherwise known as a prop firm, is  company which will fund a trader so that the trader can trade with money which isn’t their own. There is then an agreed upon split of profits usually around 50/50. This can be mutually beneficial if a trader knows how to trade but doesn’t have enough of their own money to make their profits worth while, whereas the prop firm may have the capital available to be invested and are happy to delegate the workload to the trader.

So clearly, for those who have no money or access to money this is a great way to sill utilise their skills as a trader, it allows traders to trade large lot sizes without putting their capital at risk and practice trading at size.

But let’s look as a few negatives which you don’t have when you trade your own money.

There is usually a sign up fee or administration fee so you do still have to pay some money.

There is usually a challenge which you have to pass to get the funding, so for those who don’t perform well under pressure or don’t like ‘exam’ type situations this can be very stressful.

You aren’t given a huge lump sum at first, you have to build up to this and it can take quite a lot of time to make this worthwhile. For example if you start off with £10,000 in funding and you need to make 10% before you get a pay out then you’ll need to make £1,000 before you get paid and you’ll have to pay the prop firm £500 of this, which means you only made £500 that month even though making 10% a month is very difficult and would make you a very skilled trader. You are then often able to unlock more money but say if it’s then double (obviously each prop firm will have different levels and different rules) You would then have £20,000 to trade and if you were able to make 10% which is £2,000 that month you are then able to keep £1,000 – which is still much less then minimum wage for a whole months work in the UK, 3 months in a row making 10% would make you an exceptional trader and a lot actually buckle under the pressure of having to be so consistent for such  long period of time. If you trade your own money you don’t have to wait until you hit 10% to withdraw your money and you don’t have to split the money with anyone else.

Prop firms also often have very strict risk management rules which is completely understandable and fair enough but it can be quite restricting and mean that you have to adjust the way that you trade and your trading strategy. You are usually only allowed to lose 5-10% before you are cut off and lose access to the funds. I understand this is  good thing and very good discipline training for a trader but it does mean that often traders ill need to be extra careful with their lot sizes and stop losses so they don’t lose access to the money. I have heard of many traders who made a silly mistake and then lost access and had to start all over again which they found time consuming and tedious.

There are often restrictions as well as to the amount of days you can trade before you are able to get a pay out, often traders are told that they have to trade a minimum of 10 days in a month to  qualify for a pay out. If your normal strategy involves trading less frequently or jut looking for high probability trades and opting for quality over quantity, you might find this an unnecessary restriction which might actually cause you to over trade and lose money rather than making it.

Another disadvantage to prop firm trading is that the market available are often very restricted so you might be told you can only trade forex markets which would be frustrating if you liked to also trade commodities stocks or indices. 

Having said all of this what are my personal views on prop firm trading for myself? Well I’ve always been a little bit sceptical for all of the reasons listed above. I’ve heard many horror stories from traders who had bad experiences and had their funding cut off because of a small mistake or traders who worked hard all month to make 9% profits and therefore weren’t able to unlock their profits. I also didn’t like the fact that I might be restricted to the markets I could trade. I like to trade forex, gold and the indices so I wanted to make sure there was a prop firm where I could trade all of these and not have to pick just one.

But I’ve recently decided that I am actually going to go for it and apply for funding. I’ve picked a prop firm which allows me to trade all the markets I trade  and I’ve come up with a strategy which has  high risk to reward ratio and will allow me to start small and build up margin before I go for bigger lot sizes to unlock that 10%. I have accepted that I’ll be taking somewhat of  a pay cut for a few months as I get used to the various nuances of prop firm trading and have accepted that it will take time to scale up to the big bucks. So I’m excited about this new chapter in my life despite the fact that I’ve been relatively negative about prop firms in this blog post. I do think they are great for traders but I felt like it was worth giving both sides of the story and being honest about some of the negatives which I’m not hearing many trading mentors talking about.

I will keep you updated on my prop firm journey

Until then,

Happy Trading!

Love From, Your Trading Mentor x