The Dangers of Trading Forex With Prop Firms

  • August 7, 2022

As the retail forex industry boomed throughout lockdown, so did the retail prop firm industry, with an explosion in traders looking to take on funded trading accounts. This demand was quickly catered for by hundreds of new prop firms coming out of the woodwork. Whilst this presents a huge opportunity for traders looking to scale their trading capital, these new firms also come bearing much higher risk than ever before. Are forex prop firms all doomed to fail?

Well, no, not exactly.

In this article, we are going to assess all the risks that you will need to bear in mind if you’re seeking funded trading accounts from prop firms. Let’s get into it…

The Dangers Of Trading With Forex Prop Firms

In theory, forex prop firms present a brilliant opportunity for retail forex traders. Before 2020, the only way for profitable forex traders to get funding was from high-networth individuals or signing contracts with traditional prop firms. Since then, a huge number of forex prop firms have entered the industry. This is great, in theory. However, as with any industry that faces rapid growth, there are a number of companies looking to capitalize on good-natured retail traders and make a quick buck. Let’s look at some firms in question…

  • Funded Trader – Packed up shop, leaving thousands of traders high and dry after running a very successful prop firm, using demo accounts.
  • DT4X Trader – The same story here as with Funded Trader. A huge amount of hype, thousands of traders using demo accounts, all to be left with nothing when the rug gets pulled from underneath them.

Whether these failings were accidental or planned is irrelevant, as traders are always on the receiving end of this business practice. These are just 2 of the 20+ prop firms that have operated this model over the last few years.

High Profit Splits, Higher Drawdown Limits & Lower Profit Targets

The industry is now extremely competitive, with prop firms popping up every week with a marketing budget and seemingly a great track record. The issue with this influx of new companies is that the existing players in the market must make their offerings more attractive. What does this look like, for prop firms?

  • Lower profit targets
  • Higher drawdown caps
  • Higher profit splits

 And what happens once these are offered? More traders pass their challenges. In theory, this is great! We want as many traders as possible to succeed in the industry. However, this massively damages these ‘Ponzi scheme’ prop firms. The prop firms that give traders demo accounts to trade with (This is 95% of the top players), can only make money on traders losing their challenges. Profitable traders cost them money. By making it easier for more traders to pass their challenge and earn bigger profit splits, the company’s profit margins get lower and lower. Once that reaches a certain breaking point, the prop firm will fold and cease doing business. We’ve seen this time and time again…

Trading With Demo Accounts Vs Real Accounts

When looking at which prop firms stand the test of time, it becomes apparent that all the prop firms failing, have one thing in common… All failing prop firms use demo accounts, not real money accounts. This comes down to the fact that these ‘demo’ prop firms make no money from profitable traders. They need to find the balance of having enough profitable traders to ‘lure’ new traders in, with huge withdrawal screenshots. On the flip side, they need to ensure enough traders are failing the challenges, to afford to pay out the profitable traders. Due to the nature of these businesses, this almost becomes a Ponzi scheme. We know how those end up… As soon as the balance is skewed or there are too many traders withdrawing profits, the whole prop firm crumbles.  

We’ve modeled Lux Trading on the historic prop firm model that all traditional firms use. We make money from profit splits with profitable traders. Furthermore, we have the highest percentage of profitable traders through our challenge, because we need traders to be profitable, for us to get paid. We don’t make money on prop firm challenges, our profits come from splitting profits with profitable forex traders that we have funded. By running the prop firm in this way, we aren’t operating like a Ponzi scheme – we actually want profitable traders, rather than wanting failing traders. You’ll notice that is why so many prop firm challenges are hard to pass – this is by design. 

It’s crucial to understand how prop firms make money.

How To Stay Safe When Trading With Prop Firms

There are always going to be risks when trading with a prop firm, however, there are ways you can reduce these risks and keep yourself as safe as possible in the markets.

  • Only use real money prop firms. By using real money prop firms, you’re trading with a company that is less likely to pack up shop and disappear overnight. They’re also likely to be backed, as they have a large pool of capital ready to allocate. These kinds of prop firms are much more transparent and typically have a corporate structure.
  • Withdraw your profits. We know that some traders like to compound the profits they make on our funded accounts. We like to recommend traders withdraw profits and build their own trading capital up, alongside their funded accounts.
  • Use multiple real money prop firms. Diversification is a great way to reduce your potential risk. For instance, use a Lux Trading firm funded account alongside another real money prop firm account. This increases your profits within the markets whilst reducing risk – what more could you want?
  • Look at how the prop firm makes money. If the firm is making money from failing traders, they will want you to fail. If they are making money on profitable traders, as we do, they’ll want you to succeed and give you the tools to do so.
  • Don’t trade with a brand-new prop firm. This is fairly self-explanatory. Most of the firms you see will open and shut down within a year. Let other traders make that mistake, not you!

    How To Check If A Prop Firm Uses Real Money Accounts

    It’s relatively easy to check if a prop firm will have you trading on fake money, or real money accounts…

    • It should say in the terms of service whether you’re on a live account. Many firms will say ‘”simulated accounts”. The majority of these prop firms will claim that your trades are then mirrored onto live accounts and this is how the firms make money… This is mostly untrue.
    • Check on MetaTrader for the live badge. Although this can be manipulated, most firms are open about having the demo logo printed on your MT4 account.

       If you then realize that your funded account is a demo account, you don’t need to immediately stop trading with the account by any means. Just be aware of the fact that the prop firm you’re trading with, needs you to fail. Don’t be surprised if spreads get wider or if you’re a victim to a stop hunt. These tactics are often employed to keep traders losing. Be mindful of the fact that if you want to take your trading career seriously and be in the game for years to come, you’ll need to use a real money prop firm like Lux Trading.

      In Summary

      In conclusion, using funded trading accounts from prop firms is a way to skyrocket your success within the forex markets, but this does come with a lot of additional risks. With so many prop firms opening and closing, it’s important that you use real money prop firms instead of trusting any trading firm with a shiny logo. If a prop firm makes money off profitable traders, as we do, they’ll want you to be profitable. These businesses survive the test of time. If a prop firm makes money off losing traders, they’ll want you to fail. These businesses operate like Ponzi schemes, paying winners from losers’ losses. These will all fail, eventually.

      If you’re interested in trading with a legitimate prop firm, check out Lux Trading firm.