Short for proprietary firms, prop firms are financial institutions with a large pool of funds who trade financial markets for their private gains rather than for clients. As the word suggests, proprietary refers to private ownership. When we typically think of financial institutions, our mind conjures up images of banks.
While the primary business model of banks relies heavily on handling client funds, a bank is still a prop firm where they’ve hired other traders or analysts to trade their private funds. Prop firms nowadays can be any financial institution with a very sizable pot of money they either trade or have others trade for them.
Concerning forex traders, most prop firms these days tend to work on a commission structure instead of a fixed monthly salary. There still exists the traditional hiring of prop firm traders, such as with investment and commercial banks who need qualifications in fields mainly related to economics, mathematics, and finance. With the tough economy and the greater adoption of the internet, there are fewer jobs in this space, the few of which are highly competitive. Furthermore, they demand significant tuition fees & years of study and experience.
How the majority of prop firms operate nowadays relies mainly on marketing and support through online channels. While most would have a physical office, the traders working for them conduct their business remotely. In the last few years, greater awareness of prop firms has come to light.
Pros and cons of prop firms
The main problem that prop firms solve for traders is simply capital. Numerous studies unanimously prove that the primary reason why most traders cannot have sustainable careers is under-capitalization. The average trader across the world usually funds amounts less than $10 000, with plenty more only affording less than $1 000.
Any deposited amount can be grown substantially over time, though many fail to maintain this growth. Many traders eventually want to make a living trading forex, though their accounts may not be large enough to support all their lifestyle expenses. As we can see, this problem stems down to capital. Many prop firms allow traders access to accounts worth at least $10 000, with some offering $50 000 and above.
As we soon realize, this privilege usually comes at a cost, both financially and qualification-wise. While some exceptions exist (which we’ll cover later), most prop firms necessitate a financial commitment, typically a joining fee linked to a specific account. For example, the firm may primarily offer three accounts, $10 000, $30 000 and $50 000, with one-time fees being $200, $400, and $600, respectively.
On the one hand, it may seem unfair that prop firms charge upfront fees, though we begin to see that prop firms are businesses. Unlike the traditional route of hiring traders based on experience and qualifications and offering them salaries or commissions, prop firms need to have a solid vetting process. They don’t know the traders who would be trading their accounts and what their performance truly is. Firms also have their expenses to cover to offer these large accounts.
Owing to these enormous responsibilities, traders need to meet stringent parameters, which are mostly risk-centric. For example, most firms don’t allow traders to go above 4% as a drawdown, and they would enforce rules on the maximum positions tradable at a specific time.
What to avoid with prop firms?
- Unregistered prop firms
- Higher one-time fees than the industry norms (with a few exceptions) or firms who charge monthly fees.
- Any form of multi-level marketing structure in their marketing.
- Too unrealistic expectations.
3 Best Prop Firms For Forex Traders (recommendations)
AxiSelect by Psyquation and AxiTrader
This collaboration is not as well-known as other prop firms like OneUp Trader and Topstep Trader. The AxiSelect funding program involves Psyquation, a trade results analytics platform, and AxiTrader, an Australian broker. Leveraging the resources of the analytics platform allows for a trader to intricately track their performance and keep up with the strict targets. Upon successfully fulfilling the requirements, the program promises to fund candidates up to AU$ 350,000, and traders would receive a 20% split of any profits quarterly.
The biggest advantage of AxiSelect, which is very hard to find in the industry currently, is there are no upfront fees. The process involves traders either using their existing live accounts as performance proof or signing up to one with AxiTrader. Existing or new live accounts need to have a starting balance of at least AU$ 1000. The main disadvantage is the long verification period, which is at least six months up to one year, far longer than other firms.
The 5%ers first test you on a live account that requires a one-time fee, which is their evaluation period. This stage lasts from 20 days up to 6 months. The one-time fee increases depending on the size of the account chosen, the lowest being $270.
However, the final live accounts one is eligible to be funded with after passing the evaluation stage range from $21 000 to $52 000. Upon successful completion of this stage, profits are paid monthly with a 50-50 split.
FTMO has similar features and risk parameters to 5%ers, except that there are two verification stages before being funded. Their one-time fees are very close to those of 5%ers, but overall, industry-wise, they are still reasonably competitive. Their lowest one-time price is €155 for a $10 000 live account.
After passing these stages, the final live accounts one is eligible to be funded with range from $10 000 to $100 000 dependant on what was paid initially as a one-time fee. Traders keep a generous 70% of the profits, paid monthly.
The most obvious risk with prop firms is paying the one-time fee with no guarantee of passing their tests, as evidenced by the knowns failure rate. However, it could still be a risk worth taking if a trader is confident enough in their ability to meet all the parameters. When successful, trading for a prop firm is a great way to further supplement trading income and build a sustainable trading career.