The Benefits Of Trading With A Forex Prop Firm
You would have seen, if you’re a keen forex trader, that the online prop firm space has exploded over the last few years, bringing forward a huge amount of opportunity for traders. With many prop firms to choose from and a ‘too good to be true’ tag on many of these, some traders wonder if there’s actually any point in trying to become a funded trader. Infact, I know many profitable forex traders that still are not funded by prop firms.
In this article, we are going to look at the benefits of trading with a prop firm, beyond the obvious. So, let’s get into it…
Trading With A Forex Prop Firm – What Are The Benefits?
If you’re unfamiliar with forex prop firms, the concept is elementary. For the sake of ease, let’s take Lux Trading Firm for example. We’re looking for profitable forex traders to give our investors capital to. The idea being, when these profitable traders make profits, we take a percentage of those profits, in exchange for providing large sums of capital to consistently profitable traders. Traders can prove their profitability by undertaking a live market challenge, whereby they would need to meet certain risk and profitability criteria. If successful, the trader in question will be given login details to a sizable capital account. So, the premise is very simple. If you’re a profitable trader on a small account, we will give you up to $10,000,000 to trade with – just take the same trades as you do on the small account!
Of course, the primary benefit of this for traders will be capital… You can go from a 4 figure account to a 6 figure account overnight. However, there are many more benefits that you should be considering.
Traders often notice that their profitability actually increases when they start trading with a prop firm, whether funded or during the challenge stages. It’s quite interesting to look at why this is and how this actually happens… Firstly, traders take more accountability with other people’s money. Traders regularly take this more seriously than trading their own capital, since now they have people to answer to (in theory). This typically results in increased profitability. Not only this, this also leads to better adherence to a trading plan. Instead of just taking a punt on a trade because you can, traders often shy away from breaking their trading plans once funded. Sticking to the actual trading plan will, of course, result in better profitability.
Secondly, risk management needs to be at the forefront of any funded trader’s mind. It’s very easy to breach drawdown and maximum loss rules and lose your funded capital. Once you have millions in AUM, this is a huge issue. Therefore, traders take risk management very seriously with suitable position sizing, knowledge on economic impacts, and fixed stop losses.
Thirdly, the funded trader’s psychology is typically different from those that are trading personal funds. For example, traders on their personal capital are happier to ignore signs in the markets and leave trades open that should be closed. Due to funded traders looking to keep their accounts and capital as safe as possible, they would be more inclined to listen to changing market conditions and act accordingly.
Reduced Risk Of Capital Loss
When you’re a funded trader, although there will be more money at stake, it won’t be yours. You’re massively reducing your risk of losing capital, compared to traders that just have their own capital in their trading accounts. Let’s take some of the starter packages that we offer here. For $100,000 of trading capital, you’d be paying £449 to take this challenge. Let’s assume that you’re successful, as a profitable trader, and you have that account for months. You reach a rocky patch of drawdown due to market conditions and end up breaching the maximum drawdown on the account. This would lead to you losing that funded trading account and having to pass another challenge to test your suitability. Losing that account would cost you nothing. This is because the £449 is refundable if you pass the challenge and obtain the funding. This means that your risk exposure in the markets is literally £0, once funded.
Let’s compare that situation to a trader with $100,000 of their personal capital tied up in a trading account. If they lost 6% on the account in a few weeks, similar to the funded trader, they would be $6,000 in drawdown. A loss of $6,000, compared to a loss of $0.
Not only that, we cannot ignore the point we made previously about the fact traders take funded capital much more seriously than personal capital. This would lead to less unnecessary losses within the markets as traders are not taking unneeded risks.It would be unfair not to mention the fact that there is still risk of losing capital, of course. This risk comes from two main factors.
Firstly, if you do not pass the funded challenge, you would lose your deposit money that you paid to take the challenge. Although this is a negative, you’d have also lost that money if it was sat in your trading account – one could assume.
Secondly, prop firms can go bust, and you’d lose any profits that haven’t yet been withdrawn. We’ve published an article here about which prop firms might go bust, which should help guide you in working with a legitimate company.
It goes without saying that traders with $10,000,000 in their accounts are most likely going to earn more money per year than those with $1,000 in their accounts. This is, of course, the primary driver behind why traders look to seek funding. The math is undeniable…
Let’s take a $1000 account for this example. On your $1000 account balance, you typically earn a return of 2% per month. This is a great return, but would only yield $20 per month in profit for you as a trader. You aren’t going to take this seriously, at all. If you had a $1,000,000 funded account from Lux Trading Firm, those same trades would earn you $20,000 per month in profit. Lux Trading Firm would take 30% of the profits for supplying you with the capital and taking on the risk, meaning you’d be left with $14,000 per month.
Compare that $14,000 per month, with the $20 per month that you were previously earning from the exact same trades. You can see why traders look to obtain funding instead of compounding their own trading accounts.
There is also an element of capital scaling that needs to be considered. With Lux, we offer traders a capital increase of 100% for every 10% milestone they achieve. In simple terms, every time you make 10% profit, your capital gets doubled, all the way up to $10,000,000 under management. This is obviously much faster than trying to compound your own account, and can lead to huge profits, relatively quickly.
Prospects Of Managing Funds
The exciting part of working with an online prop firm in this way is the fact that you don’t need to sign an exclusivity agreement. This means that you’re able to work with any prop firms you would like, simultaneously.
Let’s assume that you are an Elite Trader with Lux Trading Firm, with $5,000,000 under management. You’d then be able to obtain another $100,000 from another prop firm, or even more. You’d then, in theory, be able to increase your AUM to a large amount, whilst diversifying your risk exposure to each company.
Not only that, whilst doing this you’re building a verifiable track record. For example, our traders are audited by KPMG. This means that you’ll be able to approach a family office, hedge fund or other prop firms with a deck of your results and look to seek further capital.
There are various tools you can use to copy trades onto multiple MT4 accounts, to make the process of managing multiple funded accounts as easy as possible.
In Summary – Should You Trade With A Prop Firm?
In Conclusion, trading with a prop firm has a whole host of benefits that you need to consider. A huge increase in your monthly/yearly profits as a consistently profitable trader is obviously the biggest driver of traders looking for funding. However, it cannot be ignored that there is a range of other benefits worth considering!
Are you looking to get funded? Work with Lux Trading Firm now!
Tony Williamson, the owner of Prop Traders Club has done a very positive prop firm review on Lux Trading.