A prop firm (proprietary trading firm) is a company that funds traders to trade the firm's capital, taking a share of profits in exchange. Modern retail prop firms — FTMO, FundedNext, The5%ers, MyForexFunds-style operators — require traders to first pass a paid evaluation challenge. After passing, the trader gets a "funded" account (usually a simulated account whose results are mirrored or hedged in the firm's live book) and keeps a profit split, typically 80-90% in the trader's favor.
Retail prop firms differ from traditional Wall Street prop desks. The trader is not an employee, gets no salary, and trades from home on their own MT4/MT5 or cTrader terminal. Revenue for the firm comes from challenge fees plus a cut of trader profits.
Worked example
You pay $540 for a $100,000 FTMO challenge. You hit Phase 1 (10% profit) in 12 days, Phase 2 (5% profit) in 9 days. You now have a $100,000 funded account. You make $4,000 profit in your first month. With an 80/20 split you receive $3,200; FTMO keeps $800. If your account size scales, your dollar payouts scale with it.
Why it matters
Prop firms let traders with small personal capital trade meaningful size — a winning $10,000 trader can earn from a $200,000 funded account. They also impose discipline through hard drawdown rules that force risk management.
Common pitfalls
- Treating the challenge like a normal account. Drawdown rules are stricter than retail brokers; one oversized loss ends the account.
- Confusing "funded" with "real money." Most firms run simulated accounts and only hedge profitable traders' positions in the real market.
- Stacking multiple challenges hoping one passes — challenge fees compound quickly.
- Ignoring news/weekend holding rules in the firm's terms.