The rise of new prop firms in the past 2 years, the big failure of a leading prop firm, and the fact that this industry is entirely unregulated put into question whether prop firms are worth joining.
What Makes It Worth to Join a Prop Firm?
The main benefit of a prop firm is that a trader has the chance to make money without bringing in any risk capital. That’s possible because the prop firm funds the trading account with the prop firm’s capital and agrees with the prop trader to pay him based on the success of trading the funded account.
That’s, in simple words, the only real benefit a prop firm has. There are, for sure, other positive things like education and limited risk, but also disadvantages like the potential of overtrading and gamification. All in all, it always comes back to the main benefit of getting control over capital without the need for capital.
Example:
You want to day trade. As a day trader in the United States, you need a minimum of $25,000 to do so. So what do you do if you have $500 in risk capital and not more? A prop firm can be the solution.
You join a trading challenge (some start at $49), and if you trade successfully, you can manage accounts with sizes ranging from $5,000 to $4 million. While it’s a long way to a big account, at least there is a chance to trade such an account if you have the talent and withdraw the profits based on your profit split agreement with the prop firm.
So, with the prop firm, you’d have the chance to trade such an account. With a prop firm you have.
The Dark Side of Prop Trading
Where there is light, there is shadow, and so is in prop trading. Prop firms are heavily under pressure after a major firm went bankrupt because of their business model.
More and more firms confirm that they make more money with the fees prop traders pay to the prop firm to participate in a challenge than they do with the return that their prop traders generate for the firm by trading the firm’s capital.
In an interview, a top 3 prop firm confirmed that at a big conference, they make the most money with the competition fees without naming the exact value. Still, based on how the reaction was after the reporter asked, it’s clear that it is highly likely an immense part of it.
The point with this is not that much that the company makes money; it is more that the balance between the profits traders make (and that they can withdraw) is in such an unfavorable ratio.
Realistically and rationally viewed, this only confirms what’s already known about trading – most traders lose money. That’s a fact, and it’s not different in prop trading.
Funded Account Is not Funded Account, aka Cash is Sometimes Paper.
A somehow grey area that came up after the bankruptcy of a leading prop firm is that not every prop firm funds the account of the funded trader with real money. Instead, some firms are now known for funding their traders with paper money.
This is somehow a questionable practice and underlines that it is highly likely that most traders don’t succeed with prop trading. So instead of all those things needed to fund an account with real money with a real broker and a real account (lots of back office work), the prop firm lets the user continue trading with virtual money.
Still, while this might sound negative, it not necessarely is. That’s because the most important question is if the prop firm at least pays out the profit their successful prop traders do. And so far, it seems that this is the case.
Due Diligence Due Diligence Due Diligence
With prop firms, it’s like with crypto. Where greed and high potential returns dominate the business, there is lots of dark side potential.
And in the end, it’s you who is entirely responsible for making the right decisions.
Think about it. There is a proprietary trading firm that sounds to have the best offer. They are brand new; there is no contact detail on their site, and you don’t know anything about the founder, the business, etc. But the offer sounds so fantastic!
So, you decide to join. And you make it through the 1-step challenge. You get your funded account. You grow your account from $25,000 to $100,000 within 1 month. Now, you request the payout.
OMG, what happens? It happens as it was supposed to. You blindly joined a prop firm despite all the warning signs. Who’s fault is it? It’s yours. Period.
You have to do your due diligence.
How To Choose a Prop Firm and Why Topstep Is Our Favorite
My approach here is relatively simple. A prop firm that has a meaningful history in the business, a prop firm that’s entirely transparent about their company, a prop firm that is known for paying out profits to their prop trader – this is the prop firm that’s worth it to join.
I believe that Topstep is that firm. And it’s the only one we work with. There are other good prop firms out there—no question about that. But still, we only work with Topstep.
Does that mean that you have to decide on Topstep? No, not at all. You can choose another one and try, for example, some low-cost challenges. Test what platform suits you the best, test where the order routing is the fastest, and test where the trade executions are best. It’s likely that at some point, you will choose Topstep anyway.