Want to start trading but constrained by your resources and capital? Or maybe you’re looking for a way to trade while being part of a community, learning and communicating with others along the way? You may have come across funded trading, an option that allows you to trade using capital from a third party in return for profit sharing.
But what exactly is funded training, how does it work, and what can you expect? In this guide, we’ll answer these questions and more.
Introduction to funded trading
To determine whether funded training is right for you, you need to understand what it is.
Definition of funded trading
Funded trading gets its name because traders don’t use their own capital in transactions. Instead, a company known as a “prop firm” provides a platform for the trader to use and supplies them with capital via a funded trading account, allowing them to trade on behalf of the prop firm.
The two parties then split the profits.
Therefore, the prop firm acts as a kind of partner. As well as offering capital, these companies often give the traders resources and tools to help them. Often, they provide training through a simulated trading environment.
Importance of funded trading in the financial markets
Funded trading isn’t the only way to access the financial markets and become a prop trader, but it fulfills a useful function. Traditionally, trading had numerous barriers to entry, such as access to capital and knowledge of how to access the markets.
Prop trading firms provide traders with everything they need to get started — both the financial means and the knowledge of how to use a platform. This has helped to remove the biggest obstacles involved in trading.
How funded trading accounts work
Once you understand the concept behind funded trading, getting your head around funded trading accounts is easy enough.
The concept behind funded trading accounts
Funded trading accounts are simply the accounts traders use when participating in funded trading with a prop firm. The account gives them access to a fixed amount of capital dictated by the prop firm, which may be dependent on the trader’s performance in challenges.
Key components of a funded trading program
Prop firms don’t give their money to just anyone.
Instead, traders have to participate in evaluation stages known as trading challenges (funded trading), which prop firms use to select the traders they want to work with. We have covered this in further detail later in the guide.
Once traders are accepted, their funded trading account will typically have certain restrictions, such as maximum drawdown limits and profit targets.
To stay on the program, traders may have to consistently earn certain profits and properly manage their risks.
Benefits of funded trading for traders
Funded trading offers freedom and the potential to earn high amounts while learning skills. Below, we’ve listed the main benefits.
No personal capital at risk
When traders use their own capital for trading, they’re putting their own money on the line. This involves personal risk and means that traders with limited funds may not be able to get started — and if they do, the profits they can make will be more limited.
Funded trading is essentially a type of no risk trading. Yet despite this, traders who work with prop firms still benefit from a share of the profits, which is an attractive prospect for many.
Access to higher leverage and resources
Not only do prop firms let traders onto their teams and give them capital, but prop firms also offer them trading resources and tools along the way to make them better traders. For instance, they often help their traders with risk management by providing them strategies to follow.
Another perk is the access to higher leverage in funded trading. Due to the existing trading capital and historical records of prop firms, trading platforms and lenders are more willing to give them a greater amount of leverage.
Steps to obtain a funded trading account
Prop firms want to ensure they take on the brightest and most capable traders, so they have requirements in place to vet them.
Evaluation phases and challenges
In most cases, traders have to go through a challenge to be accepted onto a prop firm platform. This involves trading in a simulated environment and consistently being successful.
In some cases, there is more than one challenge to complete. This is often the case if the platform is advertised for beginners, as the initial challenge is partly an educational experience, while the second is designed to test their trading skills.
Challenges for beginners are more likely to charge participation fees. Also, in some cases, traders have the option to pay a fee to receive instant funding, in which case they don’t have to pass a test at all.
Qualification requirements for traders
Prop firms normally don’t require traders to have fixed qualifications or experience. Instead, they want them to demonstrate that they can give results in the simulated trading environment.
To sign up for funded trading, the process involves the following steps:
- Choose a prop firm.
- Learn the terms and conditions of its challenges and trading arrangements.
- Complete the trading challenges (funded trading).
- Go through account verification.
- Start trading on your free funded account.
Popular funded Trading platforms
If you think a funded trader program could be a good fit for you, the next step is to figure out which platform to use. Some prop firms encourage beginners and are willing to teach them the basics, while others are looking for already experienced traders who want to maximize their profits.
But whatever you’re looking for, there’s something out there to suit you.
Overview of major providers
Challenge4Trading is a beginner-friendly prop firm aiming to open the world of trading to all. Anyone can sign up for €49 to give a trading challenge a go. Depending on your level of skill, there are two options:
- Try a first-step challenge and then a second challenge.
- Complete one challenge only for the chance at keeping a larger share of profits.
If you’re accepted, you can enjoy profit sharing agreements that allow traders to keep up to 90%. There are also plenty of resources to help you boost your skills, including online courses. Challenge4Trading uses the Sirix platform for trading and funds accounts up to €500,000.
Other major providers include:
- FTMOP
- The Funded Trader
- TopstepTrader
- Earn2Trade
Key features to consider when choosing a platform
Some aspects to consider when weighing up different platforms include:
- Deposit requirements (the amount traders are expected to contribute)
- Withdrawal and payout rules
- Option to reset account where needed
- Support offered
- Types of assets the platform supports (such as forex or cryptocurrencies)
Challenges and risks in funded trading
Like anything, funded trading comes with potential drawbacks.
Common pitfalls faced by traders
For many traders, passing a funded trading challenge is a tricky process, and it may take multiple attempts to get this right.
In some cases, there may also be issues with the set-up required for funded trading. Funded accounts often have maximum capital allocations, which can be restricting for traders who already have significant access to capital without the prop firm.
Risk management strategies for success
The risks involved in funded trading are another major challenge. But as outlined already, many prop firms will help you navigate this by equipping you with risk management strategies.
These may include:
- Setting stop-loss orders
- Sizing positions appropriately
- Diversification
- Regular monitoring and analysis
How to maximize your success with a funded account
Once you have a funded account, it can be taken away at any moment if you use it irresponsibly. To avoid this from happening, we have some final tips.
Developing a consistent trading strategy
There’s more than one way to be a successful trader, but one thing all traders have in common is a clear framework that outlines their approach. They choose a way of trading that fits their objectives and their strengths and stick to that.
Some of the most common trading strategies include:
- Day trading
- Swing trading
- Scalping
- Position trading
Importance of discipline and emotional control
No matter how skilled you are at the technical aspects of trading and how finely-tuned your trading strategy is, don’t underestimate the importance of emotional control.
When trading, emotions often run high — it creates a strong reaction in most people to see their portfolio suddenly shrinking or surging in value. This can create the temptation to make overly risky trades or impulsively sell assets at the wrong time.
Disciplined and emotionally intelligent traders are aware of these tendencies and have frameworks in place to help them make trading decisions based on strategy rather than emotion.
Conclusion
Just like trading independently, funded trading has its pros and cons.
The future of funded trading accounts
As long as barriers to traditional trading remain high, funded trading accounts are likely to remain popular. However, there may be further innovation to come, such as more sophisticated tools or different asset classes.
Final thoughts on getting started in funded trading
For those who already have some experience in trading but lack capital or individuals who want a structured experience to develop their skills, taking part in a funded trading program may make sense. But remember that it’s your responsibility to manage emotions and risks and stick to a strategy, regardless of the support you receive from a platform.
