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 typically simulated, so the firm does not hand live capital to an unproven trader. And on evaluation products every trader is filtered by the test 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. Instant-funding products skip the test and sell a funded account directly, with loss rules active from the first trade.

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 shows the rules only, not the fee. The pricing model sets when the fee is paid, not which rules apply: a subscription firm also sets a profit target and a drawdown limit, but the figures, the drawdown type, and whether a daily loss limit applies at all vary by firm and product, as they do under one-time pricing.

Two revenue streams keep a prop firm running. Fees are the first. Most Evaluation Phase attempts do not pass, every attempt is paid, and many traders 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, for example 80% at one firm and 90% at another, and the firm keeps the rest. The split is set in the funded-account agreement and governs each withdrawal; some firms raise it at a scaling milestone or as a paid add-on.

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 minority of attempts that 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 tests one main pass objective against a set of loss rules, all active at the same time. Its pass objective is a Profit Target: reach a set gain on the simulated balance. The fail conditions are loss rules. A Maximum Drawdown caps how far the account's equity can fall from its starting point or its highest point, and touching or crossing it, depending on the firm, ends the attempt. Many products also set a Daily Loss Limit that caps how much can be lost in a single day: crossing it ends the attempt at some firms and stops trading only for the rest of that day at others.

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 only the targets, which isolates the point of the two-phase design: it tests consistency, not a single good run. Published products also differ in their loss limits between the two structures, so holding the limits fixed is a simplification.

The targets are set to be reachable and the loss rules to be tight. The walkthrough's illustrative one-phase example 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. Some published one-phase products pair the 10% target with a 3% daily limit and a 10% trailing drawdown, or with a 3% daily limit and a 6% static one; the 5% daily and 10% static pair appears on two-phase products.

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

Where a daily loss limit applies, a single losing day from a fresh start meets it before the total drawdown, because the daily cap is the smaller limit: $5,000 against $10,000 in the example above. One oversized losing day can breach the daily cap long before a trader approaches the gain they need. The next guide in this series covers each rule in detail.

Passing the evaluation leads to a Funded Account. The mechanics of trading do not change: the balance is typically still simulated, and loss rules similar to the evaluation's 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. Breaching a hard loss rule ends a funded account, and the consequence can be stricter than in the evaluation: at some firms a maximum-loss breach that a paid reset undoes during the evaluation closes a funded account permanently. Where the daily loss limit is a soft rule, crossing it stops trading only for the rest of that day. 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 the whole deposit, and more if a price gap leaves a negative balance the broker does not absorb. 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 the fees paid to the firm. 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.