Forex Risk Management: How Prop Firms Limit Your Exposure To Risk (2024)

Why Trade With A Prop Firm?

Prop firms are a great way to get access to leverage and capital with a lot less overall risk on the table. Rather than taking $100,000 USD of your own money for example, and risking 1%, you can simply pay around $600-700 USD, complete a challenge and verification, and get access to “$100,000 USD” in a “funded” demo account. Now of course, there is a max draw-down rule of 10%, meaning you can only draw down $10,000 on a $100,000 account.

What You Should Know About Risk

What most traders fail to understand early on is that if you have to risk a lot to make a lot, you’re not really making much. Profits should always be looked at relative to the risk put onto trades. If you risk $500 in a $1,000 personal account to make $1,000, this wouldn’t be considered good risk management, because you’re effectively risked 50% of your entire account, all you’d need is 2 losses to completely wipe it out.

The nice thing about prop firms is that while it’s difficult to complete a challenge and verification (usually 10% + 5% gain over 2-3 months), they do limit your downside risk to the cost of a challenge fee (which again is roughly $600-$700 USD). With that being said, having access to a theoretical $100,000 account in which they copy profitable trades from and pay you out from in the form of profit splits, makes the overall risk to reward very enticing.

Understanding How Leverage Works In The Forex Market

One of the most truly misunderstood parts about trading, especially in the forex and indices market is leverage. Because forex moves in such small increments, you actually need a sizable amount of capital or leverage in order to trade these markets. Compared to a stock, forex pairs move mere fractions of a cent, meaning you need anywhere from 20:1, 50:1, or even 100:1 leverage to be able to open a position large enough to effectively trade with.

Luckily, most brokers and prop firms offer a good amount of leverage, so you’re able to trade with a sizable amount of capital. Even if you have a relatively small personal account, or you’re trading a funded prop firm account, you can open orders ranging from as small as a micro lot to several standard lots, with a standard lot being 100,000 currency units. So imagine opening a 20 lot order on a $100,000 account, that’s a massive 2,000,000 currency units!

Does Trading With A Prop Firm Carry Less Risk Than Trading For Yourself?

If you ask us, the simple answer is yes. The long answer is generally, yes, but sometimes no. It really depends on the amount of capital you have personally to trade with, and what you’re risking when trading your personal account. That being said, we think that for most traders around the world, a prop firm challenge isn’t cheap ranging from $200-$2,000 depending on the account size, but it’s a lot easier than coming up with tens or even hundreds of thousands of dollars of your own money to trade with, plus the risk that you’ll blow all of that money and be on the hook for the losses if you’re still learning how to trade.

Prop firms effectively insulate you from losing that entire account, which in our opinion is a really great way to get access to capital without risking so much money. The trade-off of course is that it’s difficult to pass a challenge, and if you’re really inconsistent, it can lead to failing a lot of challenges and verifications, or outright losing funded accounts, which then in turn means you’ll need to go through the entire 2-3 month process all over again to regain access to the prop firm’s “capital” you were trading.

Again, we are putting a lot of things in quotation marks because most prop firms just give you a demo account to trade with, and copy their profitable traders’ trades to live accounts. Only a handful actually give you a completely live account to trade with.

Can I still lose money if I’m trading with a prop firm?

Yes, as mentioned above, the biggest risk to you is that you could lose your challenge fee, and even worse, if you’re already trading and you hit the 10% max drawdown rule you will lose access to funding, which can set you back several months as you try to complete a challenge and verification again. This is why forex risk management is so important as a prop firm trader, and as a trader who trades with their own capital too.

Trading with a prop firm like E8 Funding or FTMO is the best way to build up a personal account in the long term.

With the absolute flood of new prop firms that have come out in recent months, funding has never been more accessible to traders. In the long run, we suggest using a prop firm like FTMO or E8 Funding and building up profits into a personal account. Not only will you build experience trading with good risk management constraints that the prop firms provide you with, but you’ll be able to slowly build up enough of a personal account to trade with.

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Robert Castillo
@coldwaterfx
FX Trader & Analyst
Writer & Editor

Rob is a funded trader from Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading he enjoys making music, boxing, and riding his motorcycle.