What Is a Prop Firm and How Do They Work?
Proprietary trading firms, commonly known as prop firms, are becoming increasingly popular among both aspiring and experienced traders. These firms provide individuals with the opportunity to trade using company capital rather than their own money. This model enables skilled traders to scale their potential earnings without taking on personal financial risk—something that’s particularly attractive in volatile markets.
At their core, prop firms are financial entities that invest their own funds into the market, seeking to profit through the talent and discipline of professional traders. The traders are compensated based on performance, often receiving a share of the profits they generate. This structure aligns the interests of both the trader and the firm, encouraging disciplined, high-quality trading over high-risk gambling.
Prop trading isn’t new. It’s been around for decades, especially in the world of equities and futures. However, the last few years have seen the rise of a new wave of online-based, remote-access prop firms. These firms focus heavily on forex, crypto, and CFD markets and are accessible to traders around the world—no Wall Street experience required.
There are two primary types of proprietary trading firms: traditional in-house firms and online/remote-access funding firms.
Traditional prop firms are based in physical offices, usually in financial centers like New York, London, or Hong Kong. Traders are typically required to go through a rigorous interview process and training program. Once hired, they receive access to the firm’s capital, trading systems, and real-time data feeds. These firms often provide a base salary in addition to performance-based bonuses. The environment is fast-paced and competitive, designed to cultivate elite-level talent.
On the other hand, online prop firms—often referred to as funding firms—operate entirely online. They allow individuals to become funded traders by passing a performance-based evaluation or challenge. These firms exploded in popularity due to their accessibility. Traders from virtually anywhere in the world can apply, prove themselves through a demo account challenge, and, if successful, trade live capital on behalf of the firm.
To access funding, traders usually need to pay a fee to take a challenge or evaluation. These challenges test the trader’s ability to follow risk management rules and hit profit targets within a specified time frame—often 30 to 60 days. If the trader passes, they are offered a funded account with the opportunity to earn a share of profits, usually ranging from 70% to 90%.
The concept of a “challenge” or “evaluation” is what makes online prop firms different from traditional institutions. These firms want to ensure that traders are skilled, consistent, and risk-conscious before providing real capital. Rather than reviewing résumés or academic backgrounds, prop firms assess traders based on live performance metrics.
Once funded, the trader’s job is straightforward: trade consistently and within the firm’s rules. These rules often include maximum daily drawdowns, maximum position sizes, and restrictions on news trading or holding trades overnight. If the trader breaks these rules, the funded account is usually revoked. However, many firms allow traders to retry or reset their account for an additional fee.
One of the most attractive aspects of trading with a prop firm is the opportunity to manage significant capital. Many firms offer account sizes ranging from $10,000 to $500,000 or more. For a retail trader with a small personal account, scaling up through a prop firm can dramatically increase profit potential—without putting personal capital at risk.
Profit splits are a central part of the prop firm model. Most firms operate on a 70/30 or 80/20 basis, meaning the trader keeps 70–80% of the profits, and the firm takes the remaining portion. Some firms offer even higher splits, especially for traders who demonstrate consistent profitability over time. These profit-sharing arrangements reward performance and create long-term incentives for traders to stick with the firm.
From a business perspective, prop firms operate similarly to venture capitalists. They take on risk by investing in people rather than ideas. The upfront cost of a challenge fee helps the firm offset risk and filter out unqualified traders. Those who pass the challenge and succeed as funded traders help the firm grow its capital base and reputation.
There are also variations in how prop firms handle funding. Some offer “simulated funding,” where traders are technically still trading on demo accounts that mirror live conditions. Payouts are issued based on performance, but the trades don’t impact real market liquidity. Other firms offer “live funding,” where trades are placed directly into live markets with real money. While both models can be profitable, traders should research which method a firm uses and what that means for payouts and execution.
With this model, trust and transparency are critical. The rapid growth of the industry has unfortunately led to some less-than-reputable firms entering the space. Traders should always do their due diligence by reading reviews, analyzing funding terms, and checking for red flags such as hidden fees, unrealistic rules, or poor support. Reliable firms clearly state their rules, payment schedules, and challenge requirements.
Technology plays a major role in prop trading. Most online firms use platforms like MetaTrader 4, MetaTrader 5, cTrader, or TradingView. These platforms allow traders to execute their strategies efficiently and access market data, performance tracking, and trade history. Some firms even provide built-in dashboards that track metrics like win rate, risk-to-reward ratio, drawdown, and overall consistency—tools that help both the firm and the trader monitor progress.
It’s worth noting that trading with a prop firm isn’t a guaranteed path to success. Many traders fail challenges multiple times before becoming consistently profitable. Success requires strict risk management, emotional control, and a solid trading strategy. Prop firms reward discipline, not just big wins. Reckless or over-leveraged trading might lead to short-term gains, but it often results in a failed account.
A trader’s journey with a prop firm can be broken down into three stages:
- Challenge Stage – The trader pays a fee and attempts to pass a trading evaluation with specific profit and risk rules.
- Verification Stage – Some firms require a second round of consistent performance to confirm that the success wasn’t a fluke.
- Funded Stage – The trader is given access to real (or simulated) capital and earns a portion of profits while continuing to follow rules.
Many firms also offer scaling plans. If a trader continues to meet performance goals, their capital allocation may be increased every few months—sometimes up to $2 million or more. This rewards consistent behavior and encourages long-term commitment.
Prop trading can be a game-changer for individuals who are skilled but undercapitalized. For traders who understand risk and have developed a repeatable strategy, partnering with a prop firm offers a path to professional-level trading without the traditional barriers of education, connections, or massive personal capital.
Still, it’s important to approach prop trading with realistic expectations. This is not a get-rich-quick scheme. It takes time, preparation, and practice to consistently pass evaluations and stay funded. The best traders treat it like a business—planning trades, tracking data, and continuously improving.
As the prop firm industry continues to grow, the competition among firms is driving better trader conditions, higher profit splits, and more transparency. With new tools, platforms, and funding models emerging each year, it’s never been a better time to explore the world of prop trading.
For any trader seeking a professional edge, proprietary trading offers not just access to capital—but access to a system where skill truly determines success.