The Truth About Forex Prop Firms

  • June 26, 2022
The Truth About Forex Prop Firms

Forex prop firms have divided the online retail trading community over the last few years. The potential for huge amounts of trading capital with such a low barrier of entry does seem too good to be true. It’s no secret that opportunists are making use of this growing industry and there are prop firms popping up out of thin air. With more funding options for traders, it’s more important than ever to understand what’s going on under the bonnet and get a more in-depth knowledge of how these firms are operating. So, let’s find out more about the different models and how prop firms make money

The Truth About Forex Prop Firms

 When we first started in the online prop firm industry, there were only a handful of firms, most of which are no longer in business. Since then, there are now around 50 new online forex prop firms and the number is rapidly growing – every week we hear of more companies popping up around the world. Although this is great for the industry and it’s brilliant for retail traders to have opportunities to further their careers, the operating model has also rapidly changed. Historically, there has been a very simple model in which prop firms operate. Profitable traders are given a large sum of capital and the profits of their efforts and shared between them and the firm.

The model that these new, carbon copy prop firms are using is more of a pyramid scheme style. Not only is this dangerous for traders, but it also won’t be long until regulators start paying more attention to this type of activity. Let’s take a deeper look at this type of prop firm below…

The Gambling Prop Firm Model

The majority of the forex prop firms you’ll be familiar with are purely operating on a gambling business model. They have no interest in working with profitable traders or even helping traders reach profitability. Traders are now offered instant funding with 100% profit splits. It’s clear that if you’re a profitable trader, you’ll be paid out from other traders failing their trading challenges (which are designed to maximize failure rates).

To date, Lux Trading Firm is the only firm to offer traders real, live money accounts and the training needed to make real, consistent returns in a responsible way. In fact, compared to other offerings within the market, we have slightly stricter risk management rules and a lower profit split. However, we have a much higher rate of funding than other firms.

 Industry Average – 4% funded rate.

Lux Elite Club – 20% funded rate.

If you’re serious about trading for a living and learning proper risk management, being funded with real capital, and actually managing assets, rather than just gambling within a pyramid scheme, check out our Elite Traders Club for more information.

Churn Of Traders

 Prop firms operating this business model rely on clever marketing, get rich quick mentality, and a constant churn of newbie traders. It’s clear that the majority of retail traders now know that most prop firms are giving them a virtual money account to trade on. It’s even widely known that over 95% of traders fail prop firm challenges. With the profitable traders sitting on demo accounts, their withdrawals are being paid purely from the losses of other traders.

Due to the clever marketing tactics, this still doesn’t stop traders from paying the challenge fees over and over again. This dance is not going to stop until the regulators get involved. The promise of huge trading accounts and email marketing campaigns showing $100,000 withdrawals even manages to convince unprofitable or brand new traders that it’s worth investing thousands into these new prop firms. As mentioned above, the industry average is that only 4% of traders will ever get funded, whereas Lux Trading Firm sees 20% of traders get funded as we’re less focused on the churn of traders and more interested in working with profitable traders!

Pressure From Regulators

The online forex prop firm space is one of the last forex sectors to be regulated but that doesn’t mean it isn’t coming.

 All other areas of the online retail investing space have been regulated…

  • Brokers
  • Education
  • Scams
  • Investment Funds

 However, online prop firms are yet to receive a visit from the regulators. When the regulators come, and they always do, you’ll see that the majority of the prop firms founded in the last year or two will immediately go under. The reason for this is the simple fact that these new firms are pyramid schemes, disguised as prop firms and we know how the regulators feel about pyramid schemes…

Prop Firms Setting Traders Up To Fail

Historically, prop firms have always provided a platform and the toolset needed for traders to succeed. This is due to the fact real prop firms only make profits from profitable traders, right?

However, this has now been flipped on its head.

These new-age prop firms offer trading conditions that require traders to gamble within the markets.  

  • 10% profit targets with only very few trading days to complete
  • Instant funding
  • High leverage
  • Limited drawdown management

All of these factors inspire traders to push as hard as they can, with higher risk and lack of emotional intelligence.

Prop firms purposely make it hard to pass a funding challenge.

The more traders that gamble, the more traders fail. With the business model these prop firms run, this equates to more money for them!

This is the same situation with B-book brokers. Traders soon realized that their brokers were setting them up to fail and trading against them in the markets, so the majority of forex traders moved to the ECN brokers that had their best interest in mind.

With the forex markets already being tough, why would you want your prop firm purposely making your job harder?

100% Profit Split Prop Firms

It’s important to look at the profit split being offered by the prop firm you’re looking to trade with. If the profit split is somewhere around 50%, there’s a chance that they’re making money from profitable traders. However, many of these new firms are offering a 100% profit split to traders. This shows that they are making no profit at all from their profitable traders… So where is the profit coming from?

Well, it’s coming from the traders failing their trading challenges!

Instant Funding Prop Firms

Prop firms offering instant funding are very typically running the pyramid scheme style business model. It doesn’t make sense from a business perspective to offer capital to a trader without knowing their trading ability or metrics. This shows that these prop firms will be offering you demo capital, rather than live trading funds. Now we have established the fact you’re trading on demo funds – you need to look at where your payouts are actually coming from.

If you’re on a demo account, the prop firm is making no money on your winning trades. Therefore, you are being paid out from other traders failing their trading challenges and losing money.  There is very little difference, if any, between this and a pyramid scheme and sadly it’s only a matter of time before the regulators start paying attention.

 The Traditional Prop Firm Model

 Unlike every other forex prop firm in the industry, Lux Trading Firm operates the traditional funding model used by prop firms for decades. The model is extremely simple and we are very transparent with how we generate revenue.

  1. Traders looking for large amounts of capital, come to us.
  2. We test their trading ability with realistic requirements – no gambling style challenges.
  3. We provide a 1-2-1 mentor, risk desk, analysis, an audit from KPMG, tools, and a trading platform to help our traders succeed.
  4. 20% Of the traders that enroll in the Elite Trading Club receive funding.
  5. We generate revenue from these profitable traders. We split the profits with these traders each and every month as they progress through their trading careers.
  6. We offer the profitable traders more capital at each milestone, meaning all parties increase their profits.

This is the simple model used by real prop firms all around the world. It’s simple and it works. It’s just less shiny than the instant funding scam!

Retention Of Traders

It’s important to think about what you’re actually being offered by a prop firm. These new prop firms promise the world to traders, knowing that there is only a 4% chance they will ever achieve this. At Lux Trading we are much more realistic and traditional with our offering and expectations from traders. We aren’t expecting a 10% return within 20 trading days because we know this isn’t sustainable by the large majority of traders. We don’t expect trades to be taken every day within the markets. Or 0.01 lot size positions to be taken to manipulate the minimum trading day requirements. Whereas only 4% of traders pass the typical challenge model, our Elite Club has a 20% pass rate which means we retain many more traders as career traders!

We give our traders everything needed to succeed and succeed in the right way – rather than getting lucky with a 10% trade and hoping to sustain that through a second phase.

50% Profit Split Prop Firms

Unlike these unethical prop firms, we offer a 50% profit split to our funded traders. You’ll notice this is much lower than the 100% that some funds are offering. The reason for this is simply the fact we give our traders a REAL money account. This means we only get paid for your success. This is where all of our revenue comes from. This is historically how all of the prop firms in other markets have operated. We provide traders a huge wealth of education, risk management tools, and support, alongside vast sums of capital ranging up to $10,000,000.  

In exchange for providing such a large volume of capital, we make a profit split from our traders.

No Instant Funding

With Lux Elite Club, we don’t offer instant funding to our traders. The simple reason for this is the fact that we offer live trading capital to our traders.

Although our challenge pass rate is 5x higher than the industry standard, we still have traders failing the trading challenge and we would not want to trust these traders with live capital, obviously. You will never see a traditional or legitimate prop firm offering instant funding to any traders.

If a prop firm does promise you instant funding, you can be sure that you’re trading on a demo account and you’ll only be paid out if enough traders are failing the trading challenge.

In Summary – The Secret Of Prop Firms

In Conclusion, you need to be aware of the prop firm you’re working with. If the prop firm does not have your best interest at heart, there is a very low chance of you succeeding. You can actually equate the majority of prop firms to a pyramid scheme. They set you up to fail or pay you from the losses of other traders. They have great marketing and flashy graphics to keep the churn of traders coming in.  

Lux Trading Firm operates the traditional prop firm model. Our revenue is generated from profitable traders. We do not make money on failing traders – hence why we put so much time, effort, and resources into getting all of our traders up to speed!

If you trade with a real prop firm, there are so many benefits of funded trading accounts,

If you’re serious about trading and want to trade for a living, check out our Elite Trading Club or contact our team for more information.