Prop Firms Trading: What is it, Profit Sharing, Risks, and Payouts [2023 Guide] (2024)

Preferred time zone

Prop Firms Trading: What is it, Profit Sharing, Risks, and Payouts [2023 Guide]

top of page

Prop Firms Trading: What is it, Profit Sharing, Risks, and Payouts [2023 Guide] (2)

1. What is a Prop Firm?

Proprietary trading firms, often referred to as "prop firms," represent financial entities engaged in the business of trading a diverse array of financial instruments, such as stocks, options, futures, and commodities, utilizing their internal funds. Unlike traditional financial institutions that primarily manage client funds, prop firms seek to generate profits directly for their own accounts. These firms leverage various trading strategies, encompassing both quantitative and discretionary approaches, to capitalize on market inefficiencies and exploit short-term price movements.

Prop firms generate profits from challenge fees of, unfortunately, failed clients and profit sharing with their successful ones. More on profit sharing later

Prop Firms Trading: What is it, Profit Sharing, Risks, and Payouts [2023 Guide] (5)

partnership with prop firm

2. Benefits of Prop Firm Trading

Access very large capital: This could start from $10 000 to $10 Million
The most risk you incur is losing the challenge fee. This is usually $500 per $100 000 of capital
Earn up to %90 of the profits: this is a colossal amount of profit sharing considering the low risk
Multiple Account: The majority of pro firm will allow you to pass more account multiplying the capital an the profits
Multiple prop firms: nothing stops you from pass multiple challenges at multiple prop firms

3. Nuts and Bolts of Prop Firm Funding

Proprietary trading firms operate within a structured framework that defines their functioning:

Capital Allocation: Prop firms allocate a portion of their capital to individual traders or trading teams. This capital acts as the base for executing trades and generating profits.
Trading Strategies:Traders within prop firms employ a wide range of trading strategies,

from algorithmic and high-frequency trading to fundamental and event-driven approaches. The goal is to generate returns that contribute to the firm's overall profitability.

Risk Management: Effective risk management is a cornerstone of prop firm operations. Risk parameters, including position limits and exposure thresholds, are established to prevent excessive losses and maintain stability.
Technology Integration: Prop firms heavily rely on advanced technology and trading platforms to execute trades rapidly and efficiently. Cutting-edge tools and algorithms are leveraged to gain a competitive edge.

4. Profit Sharing: Navigating the Split

A defining aspect of prop firms is the manner in which profits are shared between traders and the firm itself:

Profit Split Models: Prop firms typically adopt profit sharing models that determine how trading

profits are divided between traders and the firm. Common models include fixed percentage splits, tiered structures, and performance-based arrangements.

Performance Metrics: Traders' performance is often evaluated based on metrics such as realized profits, risk-adjusted returns, and adherence to risk management guidelines.
Incentives: Prop firms use profit sharing as an incentive mechanism, aligning traders' interests with the firm's profitability. Successful traders are rewarded with a share of the profits generated through their trading activities.

5. Navigating Risks: Rules and Regulations

The operations of prop firms are subject to a complex web of risks, necessitating adherence to stringent rules and risk management protocols:

Market Risk: The volatile nature of financial markets exposes prop firms to market risk. Traders must employ risk management models and strategies to mitigate potential losses arising from adverse market movements. The majority of prop firms employ a %5 daily drawdown and an over drawdown of %10.
Regulatory Compliance: Prop firms operate under regulatory frameworks that vary by jurisdiction. Compliance with rules and regulations, such as risk exposure limits and capital adequacy requirements, is crucial.
Counterparty Risk: Engaging in market-making activities exposes prop firms to counterparty risk. Diligent evaluation and monitoring of counterparties are essential to mitigate potential losses.

6. The Payout Process: Realizing Profits

The realization of profits and payouts within prop firms is a culmination of successful trading efforts:

Prop Firms Trading: What is it, Profit Sharing, Risks, and Payouts [2023 Guide] (6)

One LIfe Ai Payouts

Profit Distribution: Based on the predetermined profit sharing model, trading profits are distributed between the trader and the firm. Profits are calculated after deducting trading-related expenses and costs.
Payout Frequency: Payouts to traders often occur at regular intervals, such as monthly or quarterly. These payouts reflect the trader's share of the profits generated during the specified period.
Reinvestment and Growth: Traders have the flexibility to reinvest their earnings into trading activities, contributing to potential growth in their allocated capital.

7. Best Proprietary Prop Firms

We qualify proprietary trading prop firms using these criteria:

Trustworthiness:
Proof that traders got paid out on a timely manner
Responsive customer support
Industry standard challenge pricing
Trading criteria
Spreds and slippage

Prop Firm Name	Max account size	Max Scale Up	Daily DD	Overall DD
FTMO	$200K	$1.5M	%5	%10
TFF	$200K	$1.5M	%5	%10
MFF	$200K	$1.5M	%5	%10
FPF	$200K	$10M	%5	%10
Lux	$200K	$10M	%5	%10
SurgeTrader	$200K	$800K	%5	%10

8. Dos and Don't of Prop Firm Trading

What you should Do:

Have immaculate and persistent risk management: this is the single most important rules
Read the prop firm's rules of trading. They may be obscure and cost your challenge fee
Establish and a daily and weekly profit target
Obey the rules, each prop firm is unique