If you’re interested in making money through trading, you’ve probably come across funded trading and proprietary trading as two possible options to pursue. Some traders even explore options like a free funded trading account to get started without upfront costs.
In this article, we’ll break down everything you need to know about these two trading strategies, along with pros and cons and how they differ in crucial aspects.
What is funded trading?
The rise of technology has helped to democratize trading, giving those with the right skills more opportunities than ever to earn money this way. Funded trading is one of the best examples.
Definition and key concepts
Funded trading involves trading with the funding of a third party rather than your own capital. This third party is known as a prop firm — an organization that specializes in providing a platform for traders to trade with their capital.
To select traders, prop firms usually run programs (or “challenges”) where individuals trade in a simulated environment. If they are successful enough, the prop firm then brings them aboard under a profit-sharing agreement, which lets the trader use the prop firm’s capital in return for splitting the profits.
How funded trading programs work
The purpose of a funded trading program is to identify traders with the potential to be profitable and therefore make money for the company.
Some programs are more oriented to beginners, with resources to help them learn and improve their skills, while others are designed for more experienced traders.
In the case of beginner-friendly programs, it’s more likely that you will have to pay a fee to be able to anticipate. Traders then show their skills in a trading environment, and if their performance is good enough, they will pass and be offered a profit-sharing agreement.
These challenges may involve several steps. In order to pass, traders generally have to meet a certain target, such as achieving a profit of 10%. They will likely have a time limit for when they must reach this, and they’ll also have to avoid violations such as:
- Maximum daily drawdown: The amount an account can drop in value in a day
- Overall drawdown: Amount of total losses for the account
Some prop firms may place additional restrictions, such as requiring traders to use a stop loss.
At times, the eventual profit-sharing agreement the prop firm offers will depend on the results achieved in the challenge, with better trading receiving more favorable offers.
To boost their chances, applicants should learn about market trends and potential strategies beforehand, have an awareness of how their emotions affect their trading, and know how to manage risks along the way.
What is proprietary trading?
A proprietary trading firm is a more traditional form of funding trading. Let’s explore this in more detail.
Definition and key principles
Proprietary trading (also known as prop trading) is when employees trade on behalf of their employer. As with funded trading, these traders don’t use their own capital — but instead of joining a program, they trade as part of their employment contract.
This means they receive a salary and have to turn up to the office in person to trade.
The role of proprietary trading firms
Prop firms have long been a key part of trading on Wall Street and in traditional finance, where they have helped to drive markets.
While the advent of technology and innovations like prop firms have shifted the landscape, they retain key importance.
Key Differences Between Funded Trading and Proprietary Trading
As you can see, funded and proprietary trading aren’t exactly a million miles away from each other. But there are some key differences, as outlined below.
Funding Structure
Pop firms give their traders a predefined amount of leverage to control how much they can lose on trades. They also tend to put risk management strategies in place for traders to follow, such as the need to apply stop losses, and require them to follow certain strategies.
In proprietary trading firms, traders also receive guidelines that dictate the approach they should take when trading. But they’re likely to face fewer restrictions overall and are allowed to use more advanced trading strategies. They also tend to have access to more leverage.
Risk and reward models
Traders under both structures aren’t using their own money to trade, which reduces their risks. They usually both earn a share of the profits they make — but there are some differences between the two.
In-house traders for proprietary firms already receive a salary for their job, regardless of the profits they earn. The profits they earn generally come in the form of bonuses that depend on their performance.
Those participating in funded trading programs are only compensated by their profits. This will vary significantly depending on the prop firm in question and the success achieved in the funding challenge — they may earn far more or far less than proprietary traders.
Pros and cons of funded trading
Wondering if funded trading is for you? Say no more.
Benefits of joining funded trading programs
The biggest advantage of joining a funded trading program is access to capital that traders wouldn’t have otherwise. Trading with more money gives them the potential to earn much higher returns.
Since they’re trading with the funds of the prop firm, they’re also exposed to less risk.
Plus, many traders benefit from the resources a funded account challenge gives them. Funded trading programs include professional tools and learning resources — and there may also be access to training, mentoring, or a community.
The kind of trading you can do as part of forex funding programs and other funded trading programs is more varied. These firms often operate in newer markets, such as cryptocurrency, as well as classics like forex. While crypto is a volatile market and therefore involves more risk, there’s also more opportunity to take advantage of sharp price movements and make greater returns.
Finally, there are fewer barriers to entry, meaning this is the more accessible option for most people.
Potential drawbacks and risks
Funded traders don’t get to keep everything they earn. It can also be expensive to join a prop firm if you have to keep paying to enter challenges
In some parts of the world, there are more restrictions placed on funded trading companies. For instance, regulators in Canada and the United States have both taken action against these providers. There’s also a minimum age to have a funded account in many areas.
Finally, there are rules you have to follow, and failing to do so could lead to suspension. You may not be able to follow certain strategies, such as scalping, as you will have to follow rules set by the prop firm.
Pros and cons of proprietary trading
For some people, proprietary trading is a better fit.
Advantages of being a proprietary trader
As a proprietary trader, you will have a certain degree of security as you will be working for a firm. This means that regardless of how much money you make from trading, you will still be compensated.
However, you may be able to trade with a larger capital allocation and higher volume. There’s also the chance to use more sophisticated strategies, which may not be allowed by a prop firm.
Also, being a trader through profession may mean benefitting from the chance to learn from highly skilled traders or join an impressive professional network.
Common challenges faced by proprietary traders
Proprietary traders have much higher barriers to entry. There are a limited number of firms looking to recruit them, and it may require connections or work experience to get your foot through the door.
Also, since proprietary traders earn through a salary and bonuses, they won’t see the full fruits from their labour.
Finally, firms that employ proprietary traders may not want them to trade in newer markets, like cryptocurrency. This is now beginning to change, but there is still some latency.
How to choose between funded trading and proprietary trading
Still not decided on whether to opt for funded trading or proprietary trading? Here are some final tips on how to make your decision.
Factors to consider in decision-making
When deciding between funding trading and proprietary trading, some of the main factors to consider include:
- The kind of trading you want to do. Certain markets, such as cryptocurrency trading, are more readily available for those pursuing funded trading.
- Your background and skillset. There are more barriers to entry for proprietary trading, so even skilled traders may struggle to get in without work experience, connections, or qualifications.
- How much flexibility and freedom you want as a trader. Those in proprietary trading generally benefit from more leverage and fewer restrictions.
Assessing your skills and financial goals
As mentioned already, proprietary trading is a more viable option for those who already have some experience trading
The best way to get an idea of your skills is to try out trading and see how much money you can make. If you’re a beginner, this ideally means using a demo account so you can see your performance without the risk of losing money.
But remember to be honest with yourself about your performance. It’s tempting to credit yourself for successful trades but dismiss your failures and convince yourself not to count them, or to give yourself an extra day if things aren’t going as planned.
Instead, record how much money you started with and how much you make, and give yourself a specific timeframe — just like you would have in a trading challenge.
You could also enroll in a funded training challenge and see how you fare. However, bear in mind that this could mean you lose some money if you pay to sign up and aren’t successful.
