From the late 1990s to the early 2000s, prop trading was mainly an institutional activity. Financial institutions and hedge funds would hire in-house traders to make profits on their behalf. But with technical advancements and market changes, individual traders have the opportunity to partner with a prop firm. If you’re wondering how do funded trading accounts work and what you can do to make profits, this guide is for you. Let’s break it down.
What are Funded Accounts?
A funded account is a form of financial arrangement between a proprietary firm and a trader. Depending on the skills and experience of a trader, a prop firm provides them with capital to trade. The amount can vary, but it typically ranges between $50,000 and $200,000.
The benefits of trading with a funded account include reduced personal risk, ability to trade at a higher level, and access to professional-grade trading tools and resources. In return, a prop firm keeps a percentage of your total profits.
How to Get a Funded Account
So, how can you get a funded account? First, you will need to pass a funded challenge.
Step 1: Pass the Evaluation Challenge
Almost all prop firms require traders to pass an evaluation challenge. They are designed to test a trader’s strategy, risk management style, and emotional resilience. Traders are given a demo account and asked to make trades with virtual money, but under real-world conditions.
Passing the evaluation challenge is not as simple as it sounds. Common rules include:
- Meeting profit targets (8-10%)
- Complying with daily loss limits (3-5%)
- Complying with daily withdrawal limits
Step 2: Get Funded and Abide By Regulations
After passing the evaluation challenge, the prop firm will fund your account. Here, too, you have to abide by certain rules. The most common regulation is the usage of risk management strategies. Profit-loss orders and take-profit orders will protect you from losing money. Moreover, many prop trading firms prohibit the usage of specific trading strategies, such as news trading and tools, such as robo-advisors.
Step 3: Profit Sharing
Next, look into the profit-sharing model of different prop firms. Common profit-split models include 90/10 or 80/20, with the trader keeping the larger portion. Make sure the prop firm offers scalability, so you can increase your profit share with time.
How to Choose a Funded Account
Not all funded accounts are the same, and selecting the wrong one can result in more losses than profits. Consider the industrial reputation of a prop firm. Make sure it has transparent policies and a competitive profit-split model. Reliable prop firms also provide resources and guides to help you polish your skills.
Some prop firms set unrealistic profit targets and withdrawal limits. This can put you under extreme emotional distress so, make sure the evaluation challenge and the consequent funded account come with doable policies. This will save you from unnecessary stress.
Conclusion
To get access to a funded account on your journey to becoming a day trader, you must first have to pass a challenging evaluation. After passing you will gain access to a funded account. Make sure to abide by regulations to stay in good standing with the firm. As you make success trades you will get to keep a majority of the profit. Choose a reputable firm and good luck!