How Prop Firms Work: Evaluation, Rules and How to Pass
A prop firm (proprietary trading firm) lets you trade an account of its capital if you pass an evaluation. You pay a fee, reach a profit target without breaking its loss limits and, if you make it, you get a funded account and keep a share of what you earn. Most accounts are not lost for lack of profit but for breaking a risk rule.
How it works, step by step
- Pick a program and account size (say, $100,000) and pay the evaluation fee.
- Evaluation: reach the profit target while following the rules. Some have one phase, others two.
- Funded account: once you pass, you trade with no target and the same loss limits.
- Profit split: you are paid a percentage of what you make, on the firm’s payout schedule.
A real example: FTMO
On a $100,000 account, according to the rules FTMO publishes:
| Rule | 2-step | 1-step |
|---|---|---|
| Profit target | 10% + 5% | 10% |
| Maximum daily loss | 5% ($5,000) | 3% ($3,000) |
| Maximum loss | 10% static | 10% trailing |
On the 2-step, you can never go below $90,000; on the 1-step, the floor rises with your best balance. All of FTMO’s rules.
The rules that close most accounts
- Daily loss: open trades count, not only closed ones. A losing position you never closed adds up too.
- Trailing maximum loss: if you make 4% and give it back, the limit is no longer where it started.
- Consistency rules: some firms cap how much of your profit can come from your best day.
- News and weekends: many restrict trading around major releases or holding over the weekend.
How to approach it to pass
The key is a daily limit that leaves room for several mistakes. Risking 0.5% per trade, 10 losers in a row fit before the 5% daily limit; at 2%, only 2. Size each trade so its stop risks that amount.
Compare the limits of the main prop firms and size each trade with the lot size calculator.
FTMO rules checked on its official site; they change often, so review them before buying an evaluation. Information only, not investment advice.
Frequently asked questions
What is a prop firm?
A company that lets you trade its capital if you pass an evaluation: you pay a fee, hit a profit target without breaking its loss limits and, if you succeed, keep a share of the profits.
What happens if I break a rule?
You lose the account: touching the daily or maximum loss once closes it, even if price would later have proven you right. To try again you usually pay for another evaluation.
What is the difference between static and trailing drawdown?
A static maximum loss is always measured from the starting balance; a trailing one rises with your highest balance, so your room does not grow as you win.
Are prop firms brokers?
No. During the evaluation you usually trade a demo account and the firm pays out under its own terms. Always read the rules and payout terms on the firm’s official site.