What is Prop Trading? Complete Guide to Proprietary Trading in 2025

What is Proprietary Trading?

Proprietary trading, commonly known as “prop trading,” is a form of trading where a firm or institution uses its own capital to trade financial instruments rather than managing client funds. In the context of retail prop trading, it refers to arrangements where traders can access a company’s capital to trade after passing an evaluation process.

The concept is straightforward: instead of risking your own money in the markets, you trade with capital provided by a prop firm. In return, the profits are split between you and the firm, typically ranging from 70% to 90% in the trader’s favor.

How Prop Trading Works

The modern prop trading model operates on a simple premise. Here’s how it typically works:

Step 1: Choose a Prop Firm

First, you select a prop trading firm that matches your trading style. Different firms specialize in different markets—some focus on futures, others on forex, and some offer stocks or crypto trading.

Step 2: Pass an Evaluation

Most prop firms require traders to pass an evaluation or “challenge” before receiving funded capital. During this evaluation, you trade on a simulated account and must meet specific profit targets while adhering to risk management rules.

Step 3: Receive Funded Capital

Once you pass the evaluation, you receive access to a funded trading account. This can range from $25,000 to $300,000 or more, depending on the program you chose.

Step 4: Trade and Share Profits

You trade the funded account following the firm’s rules. Profits are split between you and the firm, with most modern prop firms offering 80% to 90% profit splits to traders.

Traditional vs. Modern Remote Prop Firms

Traditional Prop Trading

Historically, proprietary trading was conducted by large financial institutions like investment banks and hedge funds. Traders would work in-house, often in high-pressure trading floor environments. These positions required:

• Extensive financial education and experience
• Relocation to major financial hubs like New York, London, or Chicago
• Full-time commitment with strict schedules
• Years of proving yourself before managing significant capital

Modern Remote Prop Firms

The landscape changed dramatically with the emergence of online prop firms in the 2010s. Companies like Apex Trader Funding, FTMO, Topstep, and many others revolutionized access to trading capital:

• Remote Access: Trade from anywhere with an internet connection
• Lower Barriers: No formal finance degree required
• Evaluation-Based: Prove your skills through standardized testing
• Scalable Accounts: Start small and scale up as you prove consistent profitability
• Various Markets: Access futures, forex, stocks, and even crypto markets

The Evaluation Process Explained

The evaluation is the gateway to funded trading. Understanding how it works is crucial for success.

Profit Targets

You must achieve a specified profit target, typically between 6% and 10% of the account size. For example, on a $100,000 account with a 6% target, you need to generate $6,000 in profits.

Drawdown Rules

Firms implement drawdown limits to test risk management skills:

• Maximum Drawdown: The total amount you can lose from your starting balance
• Daily Drawdown: The maximum you can lose in a single day
• Trailing Drawdown: A moving threshold that follows your equity high

Minimum Trading Days

Most evaluations require you to trade for a minimum number of days (often 5-10 days) to prevent luck-based passes and ensure consistency.

Time Limits

Some evaluations have time limits (30-60 days), while others offer unlimited time to reach the profit target.

Advantages of Prop Trading

No Personal Capital at Risk

The most significant advantage is trading without risking your own savings. Your maximum loss is the evaluation fee, not potential trading losses.

Access to Large Accounts

Prop firms provide access to capital that most retail traders couldn’t afford. Managing $100,000 or more becomes possible after a relatively small evaluation fee.

Professional Tools and Data

Many prop firms include professional trading platforms, real-time data, and educational resources as part of their offering.

Scalability

Successful traders can often scale their accounts or trade multiple funded accounts simultaneously, potentially managing millions in capital.

Income Without Large Savings

Prop trading allows skilled traders to generate income from trading even if they don’t have significant personal capital to invest.

Disadvantages of Prop Trading

Evaluation Fees

Evaluations aren’t free—they typically cost between $50 and $500 depending on account size. These fees can add up if you fail multiple attempts.

Strict Rules

Prop firms enforce strict risk management rules. Violating these rules—even accidentally—can result in losing your funded account.

Profit Sharing

You don’t keep all profits. Even with an 80/20 split, the firm takes 20% of your gains.

Pressure to Perform

The combination of rules, targets, and the fear of losing a funded account can create psychological pressure that affects trading performance.

Account Resets and Fees

Some firms charge reset fees if you fail, and monthly subscription fees can eat into profitability.

Who is Prop Trading Suitable For?

Prop trading works best for certain trader profiles:

Ideal Candidates

• Consistent Traders: Those with proven strategies and track records
• Disciplined Individuals: Traders who can follow rules without deviation
• Capital-Limited Traders: Skilled traders who lack personal trading capital
• Full-Time Aspirants: Those wanting to transition to professional trading

Less Suitable For

• Complete Beginners: Learn the basics with a demo account first
• Emotional Traders: Those who struggle with discipline and rules
• Gamblers: Prop trading requires strategic, methodical approaches
• Risk-Takers: Those uncomfortable with strict risk parameters

The Rise of Retail Prop Firms

The retail prop trading industry has exploded in recent years. Key players include:

Futures-Focused Firms

• Apex Trader Funding: Known for generous rules and frequent promotions
• Topstep: One of the original retail futures prop firms
• Earn2Trade: Offers educational resources alongside evaluations

Forex-Focused Firms

• FTMO: The largest forex prop firm with global recognition
• MyForexFunds: Popular until regulatory issues in 2023
• The Funded Trader: Various account sizes and evaluation types

Multi-Asset Firms

Many firms now offer access to multiple asset classes, allowing traders to diversify their funded trading activities.

Key Considerations Before Starting

Before diving into prop trading, consider these factors:

1. Develop a Strategy First: Have a proven trading strategy before paying for evaluations
2. Understand the Rules: Read all rules carefully—each firm is different
3. Practice on Demo: Many firms offer free practice evaluations
4. Budget for Multiple Attempts: Most traders don’t pass on the first try
5. Research the Firm: Check reviews, payout proofs, and regulatory status

Conclusion

Prop trading represents a significant opportunity for skilled traders to access capital they wouldn’t otherwise have. The model has democratized access to professional trading, allowing retail traders worldwide to potentially build careers in trading.

However, success requires discipline, a proven strategy, and thorough understanding of each firm’s rules. Prop trading isn’t a shortcut to riches—it’s a legitimate path that rewards consistent, disciplined trading performance.

Whether prop trading is right for you depends on your current skill level, risk tolerance, and commitment to following structured trading rules. For those who fit the profile, it can be a transformative opportunity to trade significant capital and potentially build a sustainable trading income.