First, beginner topics will be covered. If you don’t need that, scroll down to the section on beating prop firms.
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Prop firms are an incredible opportunity for experienced traders but a money pit for beginners. Please read this guide closely, and join the free prop firm Discord. To practice sim trading for free, go here. DO NOT use prop firms until you’re ready. There is nothing more I can do than make that clear. Would you pay $100 to join a golf competition without knowing how to golf if there was a chance you could win $1,000? Probably not, right? Never trade with money you can’t afford to lose, and never buy evaluations with money you can’t afford to lose. You need to understand your pass rates and probability of payouts before using firms. And, even then, you need to understand that there are pros and cons to using prop firms versus live accounts. They are absolutely NOT the same thing. After this guide, you can decide which path to take. Always do what’s best for YOU.
For Beginners: The Funding Process and Passing Evaluations
If you’re new to firms and need to understand the evaluation to funding process, read the example here. If you already know this, then skip ahead. Cheapest firms here.
Purchasing an evaluation - After buying an account, you will receive login and account setup instructions for whichever trading platform you chose.
Objectives - In the chart next to this, you’ll see that your profit target is $3,000 and the maximum loss limit is $2,000. You pass the evaluation when you hit the profit target. If you fail the account and want to try again, you can either pay to reset it or just buy a new account.
Following the rules - a 50% consistency rule means you can pass in as little as 2 days and that 1 single day of profit can’t be over 50% of the total profit. Let’s say you make $1,480 on day 1, and on day 2 you make $1,520. Your total profit is $3,000, so you’d pass. Firms allow a small bit of leniency for following the 50% rule.
Funded account - Passing means you’ll start on a new funded account. This account is where you’re eligible to withdraw the profits you make.
| Parameter EXAMPLES | 50K ACCOUNT EXAMPLE |
|---|---|
| Profit Target | $3,000 |
| Maximum Loss Limit | $2,000 |
| Daily Loss Limit | NONE |
| Price | $90 |
| Max Contracts | 3 minis |
| Consistency | 50% (Eval only) |
| Qualification for Payouts | 5 winning days of $150, and minimum payout is $500 |
| Withdrawal Limit | Maximum payout per request is $1,500. After 5 payouts, you are given a live account. |
More Information and Rules to Understand
I recommend reading everything on this site if you are new to firms. I haven’t put anything here that isn’t necessary.
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If the max drawdown is $2,500, then the account is failed the moment you lose $2,500. However, most firms use 1 of 2 types of drawdown systems that move up as your account grows, which are also referred to as trailing thresholds. No, they don’t follow you forever; they generally stop at the account’s starting balance.
Intraday
An intraday trailing drawdown trails the account’s highest unrealized balance, so this includes trades that haven’t been closed yet. This is terrible.
End-of-day (EOD)
An EOD drawdown is only calculated once the market has closed for the day. This is great.
To easily understand this, let’s say it’s day 1 of a new evaluation on a 50k account with a $2,500 max drawdown. Your first trade is $1,000 into profit at one point, and you close it later for a $500 win. You only take that trade. So, your account balance would obviously go from $50,000 to $50,500.
Intraday account
The minimum account balance would move up by $1,000, because that is $2,500 away from the highest unrealized account balance.
The max drawdown went from $47,500 to $48,500
EOD account
The minimum account balance would move up by only $500, because that is $2,500 away from the account balance at the end of the trading day.
The max drawdown went from $47,500 to $48,000
The drawdown systems differ in the time that they choose to calculate any adjustments. For intraday, it’s always active, whereas EOD is only calculated when the day is finished. For both, the max drawdown only moves up when the account balance hits a new high. So, if you lose money and then have profitable days after, the max drawdown won’t move until the account balance surpasses its previous highest value.
If you are still confused, I made a dedicated Drawdown Guide with helpful visuals and more info.
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Consistency Rule
A 40% consistency rule means that one single day’s profit can’t be over 40% of the total profit. Here’s a simple demonstration to understand how it works:
Day 1; +$300
Day 2; +$500
Day 3; +$200
Total profit = +$1,000
Biggest single day of profit = $500
Right now, you are not meeting the 40% consistency rule because your biggest single day of profit ($500) is 50% of the total profit. In order to follow the 40% consistency rule, the account balance would need to increase until $500 equals 40% of the total profit. For the people like me who shut down when boring math starts, just pay attention to this; divide your biggest day of profit by .4 to determine the total profit needed. In this instance, that means the account balance needs to be $1,250 for you to request a payout. Of course, understanding this rule before you get funded means that you will be planning ahead. Don’t have a massive day of earnings if that’s not how you normally trade.
Minimum Trading days
It’s as simple as it sounds; it’s just the minimum amount of trading days required to either pass an evaluation or take a payout from a funded account. Firms differ on how they use this rule, and some don’t have it at all.
News Events
Use a free site like Forexfactory.com to be aware of when there are high-impact and scheduled news events. When this happens, your entire account could be wiped out in less than a second. That’s why all firms specify what their rules are for these events. Sometimes, the rules are different depending on which account you use.
Scaling Rule
The scaling rule/plan means that you start your funded account without access to the same amount of contracts you could trade in the evaluation. As you grow/scale your account, you gain access to higher contract size. Again; as your account gets larger from profits, you can start trading with more contracts. This rule is used by many firms.
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Prop firms will never offer the same freedom that a personal account does, but that’s not really their appeal — check out this example:
Prop firm: pay $100 for a $2,500 trading account
Max amount you can lose: $100 (the cost of the evaluation)
Personal account: deposit $2,500 into a trading account
Max amount you can lose: $2,500 (or more than your initial deposit if you’re really talented)
In this example of the total cost being $100 total, you’ve essentially got 25 attempts to pass before you would’ve been better off depositing $2,500 into your own personal account. Then again, if you fail 25 times, then you probably weren’t ready, and at least you learned something in all of that time instead of losing that all with a live account on day 1. Failing 25 evaluations that have a max drawdown (and therefore true account size) of $2,500 means losing the equivalent of $62,500 (lol). So, keep this math in mind. It’s important to be analytical. Yes, prop firms make money off of failed traders who start purchasing evaluations before they’re ready. I was a fool and started too early, but now I get payouts - the learning I did to get to where I am now could’ve been done on a sim account. Please do that. If prop firms getting most of their revenue from that is upsetting, then make sure you bring that same energy to the billion-dollar CFD space where you’re trading against your broker (where they make money if their traders fail).
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Easy answer. I paid $77 for a 50k account evaluation, passed it, made $5,000 on that account, and now that’s in my bank account. Instead of dealing with the pressure of trading a personal brokerage account and watching a position move up and down $100 every 5 seconds, I can trade risk-free knowing that it’s on the firm if I lose. The reduction of that stress allows me to execute my system without as much hesitation. If I make money, then I get to keep 90% of it. Do I pass every evaluation? Of course not. Do I get payouts on every funded account? Of course not. However….
I would have to fail a prop firm account TWENTY SIX times with 0 payouts to spend the equivalent of losing just 1 $2,000 deposit into a personal brokerage account. That is the true “leverage” and appeal of a prop firm. That is why they are an incredible opportunity (ONLY once you’re ready). But what about all the rules that make it hard to get your payouts? The ones I use don’t have difficult rules. For me personally, prop firms remove a significant amount of pressure and allow me to trade position sizes that create meaningful returns (rather than being limited to 1 micro contract on a personal account). It’s an easy choice for me, but decide for yourself.
LESS PRESSURE
It’s easier to trade meaningful size when the money being risked isn’t yours.
MONEY AND RISK
Since the only costs from you are paying to take the evaluation, you can’t lose anything beyond that.
CHEAP ACCESS TO MORE CAPITAL
Paying $90 for what is essentially a $2,000 trading account is a great opportunity, even if it takes a few tries to get funded.
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Unless the prop firm specified that evaluations are a 1-time purchase, most prop firms use a subscription model. Here’s how that works:
You purchase an evaluation on the 10th of the month:
If you pass before the 10th of the next month, you will pay nothing more and that passed evaluation is over
If you’re still trading the account by the 10th of the next month, you get billed again on that date
If you fail the account
You can pay a fee to reset it and try again
You can wait until the 10th of the next month, because it will be reset for “free” when you get billed again
You can choose to cancel that account to avoid the next month’s subscription
You have to cancel the account if you don’t want it to be renewed on the next month (if you passed the evaluation, there will be no more charges on that account though). There is no subscription or payment for funded traders (as long as you don’t choose a firm with an activation fee — best firms here). After you pass an evaluation, you are then put on a new funded account.
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Trading platform
You will pick which platform you’d like to trade through during the checkout process of buying an evaluation. The available trading software to pick from will be visible during this, but you can also check their website to see what they have for options. The firm will give you all necessary instructions for logging in (they’ll give you the username and password details). It might take some time for the login information to work, since the account has to be created for you. However, from my experience, it typically only takes a couple minutes.
Market data
As for market data, this is included in the price of the evaluation. However, if you want level 2 market data, then this is usually an add-on that you’ll need to pay for. If you end up reaching a live account through the firm, you’ll legally become a “professional” trader, and you’ll be required to pay professional market data rates. The firm typically has YOU pay for that.
“Funded sim” and what’s next
When you become a funded trader, you’re almost always put on what’s called a “funded-sim account”. You start on a simulation account, and then you’ll be put on a live account if you do well. Yes, you can get payouts during the funded-sim stage. The path to a live account is extremely clear at the reputable firms. They’ll tell you exactly how much money you can make before being transferred to a live account.
Futures instrument list
As for what you can trade through futures firms, it typically includes all of the major and popular exchanges - CME, COMEX, CBOT, and NYMEX. But, make sure to confirm that with the firm you’re looking at.
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Legally, I’m not allowed to give advice, but I’m familiar with how this all works and can cover general information for most situations.
Unless otherwise stated, you’re not employed by the prop firm when you’re trading. You’re a sole proprietor, and you’ll get a 1099-NEC tax form of your payouts at the end of the year.
MOST OF THE TIME, your income from firms is treated as self-employment income, and you are responsible for paying taxes on it. Depending on how much you make and your situation, you might need to do quarterly estimated tax payments if your income is substantial. This might not apply to you, so consult with a tax professional to be sure.
Trading through prop firms loses the benefit of 60/40 tax treatment on futures gains. In a personal account, 60% of gains from futures trading are taxed at the long-term capital gains rate. That saves money if you’re making large returns. The other 40% is taxed at the short-term capital gains rate (whichever income bracket you’re in). This doesn’t make a huge difference until you start making a substantial amount. So, keep that in mind.
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Futures prop firms in the US are bound by regulations to not allow traders from certain countries to join. They do not personally make the decision on which countries to allow. Please check the firm’s website/FAQ to see if they support your country. Do not try to use a VPN to bypass these rules.
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