How prop trading works

A proprietary trading firm trades its own capital rather than client money. The traditional version of this business seated traders in an office and gave them a desk and a balance to trade. The modern retail prop firm applies the same idea at a distance: instead of hiring traders, it offers a simulated account to anyone who can prove skill on a structured test, then pays out a share of the profit they produce.

The product the firm sells is access to capital. A trader who can trade well but holds too little money to make it worthwhile can rent a larger balance by passing an evaluation. The same skill applied to a $100,000 balance produces a larger payout than it would on a $2,000 personal account, and the firm carries the downside rather than the trader.

Two conditions make this work for the firm. The traded balance is simulated, so the firm controls its real exposure separately and is never forced to hand live capital to an unproven trader. And every trader is filtered by the evaluation before any payout is possible, so the firm pays a profit share only to people who have already demonstrated they can trade within the rules.

Firms charge for the evaluation in one of two ways. The first is a one-time evaluation fee: the trader pays once to attempt the test, and pays again only to retry after a failure. The second is a recurring subscription, where a monthly fee keeps the evaluation or the funded account active for as long as the trader holds it. Some firms combine the two, pairing a smaller upfront fee with an ongoing charge.

The pricing model changes what the fee is called and when it is paid, but not the rule that matters most.

The walkthrough above uses the one-time model for clarity, but the profit target, daily loss limit, and drawdown floor it shows are identical under either pricing structure. A subscription firm tests the same things; it simply bills for the test on a schedule rather than in a single payment.

Two revenue streams keep a prop firm running. Fees are the first. Most people who attempt an Evaluation Phase do not pass it, every attempt is paid, and many who fail pay again to retry, so the fees from unsuccessful and repeated attempts form a steady stream that funds the business and covers the payouts to those who succeed.

The Profit Split is the second stream. A funded trader keeps a percentage of what they earn, commonly 80% to 90%, and the firm keeps the rest. The split is set in the funded-account agreement and governs each withdrawal; some firms raise it on a schedule.

On that withdrawal the firm keeps $500. The percentages favour the trader because the firm's margin comes from volume across many traders and from the fees of those who never reach a payout, not from taking the larger share of any single trader's profit. A firm with thousands of paying evaluations can run a generous split on the small fraction who pass and still operate at a profit.

This is also why a firm cares about the rules as much as the trader does. A payout is a real cash cost to the firm, so the evaluation is designed to fund only traders who manage risk consistently rather than those who reach a target once through an oversized position.

The evaluation is a test with one pass condition and several fail conditions, all active at the same time. The pass condition is a Profit Target: reach a set gain on the simulated balance. The fail conditions are loss rules. A Daily Loss Limit caps how much can be lost in a single day, and a Maximum Drawdown caps how far the balance can fall from its starting point or its highest point.

A one-phase evaluation has a single target. The two-phase format splits the test into two stages, each with its own target and the same loss rules, so the trader proves the result across two separate periods rather than one. Switching the structure in the walkthrough above changes the targets while the loss limits stay the same, which is the point of the two-phase design: it tests consistency, not a single good run.

The targets are set to be reachable and the loss rules to be tight. A common one-phase structure asks for a 10% gain while capping the daily loss at 5% and the total drawdown at 10%. On a $100,000 account that is a $10,000 target, a $5,000 daily loss limit, and a $10,000 maximum loss measured from the starting balance.

Many firms also set a minimum number of trading days, so the target cannot be reached in a single session, and some add a consistency rule that limits how much of the total profit any one day may contribute. Both push the trader toward a steady process rather than one outsized win.

The daily loss limit, not the profit target, is the rule that ends most attempts. A single oversized losing day breaches the daily cap long before a trader approaches the gain they need, which is why discipline on losing days decides more evaluations than skill on winning ones. The next guide in this series covers each rule in detail.

Passing the evaluation converts the test account into a Funded Account. The mechanics of trading do not change: the balance is still simulated, and the same loss rules usually still apply. What changes is the payout. Profit produced on a funded account is shared with the trader in cash on the firm's payout schedule, rather than only proving a point on a test.

Payout schedules vary. Some firms pay on a fixed cycle, others after a minimum profit is reached or a minimum number of trading days has passed. The funded-account agreement sets the cycle, the minimum withdrawal, and the split, and those terms are worth reading before an evaluation is paid for, not after it is passed.

A funded account is neither a salary nor a permanent arrangement. A breach of the loss rules ends a funded account the same way it ends an evaluation. Many firms attach a Scaling Plan that raises the account size after a record of consistent, withdrawn profit, so a trader who performs over months trades a larger balance and earns a larger cash amount from the same percentage move.

The two arrangements answer different questions. With a retail account, the question is how much of your own money you are willing to deposit and risk. A prop account asks something different: whether you can trade well enough to be trusted with the firm's balance, and it charges a fee for the test.

The trade-off is straightforward. A retail trader keeps every dollar of profit but risks every dollar of deposited capital. The prop trader gives up a share of the profit and accepts a stricter set of rules in exchange for trading a larger balance while risking only a fee. Neither arrangement is better in the abstract. They suit different amounts of starting capital and different tolerances for rules.

What prop trading does not change is the difficulty of trading itself. The evaluation filters for skill that already exists; it does not supply it. A trader who loses money on a personal account will usually lose the fee on an evaluation built around the same decisions. The model changes who owns the capital and who carries the downside, not whether the trading is any good.