In prop trading, you pay an upfront fee to take an evaluation where you show that you can trade with acceptable risk. If you pass, you trade the firm’s money and keep a portion of the profits.
Key Takeaways
- Prop firms provide you funds to trade, where profits are shared.
- You need to pass the evaluation phase to get funded.
- Successful traders can scale their trading size up to $500,000 or more, eliminating personal liability for trading losses.
Trading capital in exchange for a profit split
In this type of trading agreement, a trader does not risk their own savings on the live market. Instead, the firm provides access to a funded account. The trader receives between 70% and 90% of the profits they generate. The firm keeps the remaining percentage.
This model shifts the financial risk of trading from the individual to the firm. If the funded account incurs losses within the allowed boundaries, the firm covers them. The trader is not personally liable for losses on the funded account.
Evaluation challenges test your ability
Before receiving funded capital, you must pass an evaluation. This test requires trading on a demo account under specific rules.
Firms evaluate your performance using two primary metrics:
- Profit Target: You must reach a profit of 8% to 10% of the initial account balance.
- Drawdown Limits: Your account value must not drop below a set percentage, usually 5% in a single day or 10% overall.
These evaluations cost a fee. For example,
Funded accounts help you scale your trading capital
For individual traders, the primary limitation is account size. With $1,000 of personal capital, it will take years to scale the account to a size that generates meaningful income.
A funded account solves this scaling problem. By paying a small evaluation fee, a trader can access a $50,000 or $100,000 account. This allows the trader to place larger trades and target larger dollar gains while risking the same percentage of the account.
The difference in earning potential becomes significant when projected over time. Assuming a realistic 9% annual return and 80% profit share:
| Year | Personal Capital ($1k) | Funded Account ($100k @ 80%) |
|---|---|---|
| Year 1 | $90 | $7,200 |
| Year 3 | $295 | $21,600 |
| Year 5 | $539 | $36,000 |
5-Year Profit Comparison
Cumulative earnings after 5 years @ 9% annual return
Forge of Traders evaluation structure
Many prop firms have strict or complicated rules, which can make it difficult for traders to pass the evaluation phase.
Forge of Traders offers a more straightforward approach with an initial balance-based drawdown model. This means your limits are calculated based on your starting balance, not your fluctuating intraday equity. They offer challenges starting at $29 for a $5,000 account, with payouts available on day one.