What Traders Should Know Before Joining a Prop Firm

Proprietary trading remains an increasingly popular and accessible way for all kinds of traders to get into the trading world. It offers traders access to large amounts of capital in exchange for a cut of the profits they make. While these firms sound amazing, they still have rules that many beginners may not expect. Sure, they facilitate traders to achieve their dreams with minimal financial responsibilities, but the pressure and risks that come with it should not be overlooked. So, before you sign up with a prop firm or pay for their challenge, here’s what you need to know.

What Is a Prop Firm?

A prop firm, short for proprietary trading firm, provides capital to traders who can prove that they have a profitable trading strategy. In return, the firm takes a portion of the trader’s earnings, typically a certain percentage of it. The primary and most appealing feature of prop firms for traders is the ability to trade in the market without using their own money.

There are two types of prop firm programs: evaluation firms and instant funded firms. Evaluation firms require you to pass an evaluation or challenge before getting access to trading funds. Instant funded firms give you instant access to your trading account after you pay the fee. Some prop firms, including Maven Trading, offer both, so you can choose the one you prefer.

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The Rules

Every prop firm has risk parameters. If you break even one of them, you could lose your account or fail the challenge. Never forget to read the fine print, and especially pay attention to daily loss limits, max drawdown, profit targets, position sizing, and trading restrictions. If you don’t read the rulebook, you’re asking to be kicked out.

You still have the freedom to trade however you want, but when the funds aren’t yours, following the rules of the actual owner only makes sense. Plus, these rules are actually more for your safety than they are for minimizing the firm’s risks.

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Payout Model

Most prop firms let you keep the bigger portion of your earnings. Since they’re providing you with the capital, they require some part of it as a fair exchange. Make sure to look into their payout policies, when and how often they pay, minimum withdrawal thresholds, profit splits, and any fees or penalties.

It’s crucial to understand when and how you will get paid before signing any agreement with the firm. Some might delay payouts or require you to hit additional milestones. Taking the time to read and ask about it reduces the chances of surprises later.

Their Reputation

Many funded firms work authentically and have trustworthy reviews, but because this model is trending, scammers and fraudsters have taken the opportunity to exploit and target beginner traders. When you’re looking for a prop firm to join, don’t just click on the first result you find online. Take your time to research thoroughly. 

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Check reviews on third-party platforms, company registration, and the level of transparency and support provided. The owner or team behind the firm should be provided. Also pay attention to threads and posts about the firm on other platforms, such as social media. If you find even a single red flag, it’s best to avoid the firm altogether.

Conclusion

As prop trading has grown in recent years, there are many options for beginner traders on which firm to join. Make sure to do your research before signing up for a firm as they all have different rules and payout models. You will also want to do third party research into their reputation to ensure you are signing up for the best option.