Prop firms are becoming more and more popular with Forex traders. They seem to be a good option for traders, especially new ones. In fact, they seem to be too good to be true. Therefore, many Forex traders ask the question: are prop firms legit or they are just a scam?
Before deciding whether prop firms are legit or not, we should establish the terminology. What are prop firms? Prop firms, or proprietary firms if we are to use the full name, are companies that employ and fund traders who then participate in markets on the company's behalf.
The type of prop firms that retail Forex traders are most likely to encounter, and the one that is discussed in this article, is scouting firms. Scouting firms are online prop firms that allocate capital to traders who then use it to trade on markets, and the resulting profits are split between the company and the trader (with the trader usually taking the sizeable chunk of profits).
So, any trader can request funding from a prop firm, get it, and trade without any risk, with any of his mistakes harming only the firm? That indeed sounds too good to be true. Of course, things are not that simple.
The simple answer to the question "are prop firms legit?" is: yes. In principle. There is nothing inherently scammy about the business model of prop firms. But how do they make money then?
For starters, prop firms, of course, do not give money to just anyone who asks. Typically, they have a
Additionally, prop firms also collect fees from their traders. It can be evaluation fees, fees for trading a live account for those who have passed the evaluation, or both. The fees often ensure that even a failed trader can be profitable for the prop firm.
Buy if prop firms are legit, then another question arises.
The vast majority of prop firms are not regulated. If they are dealing with money, why they do not have the same obligations as Forex brokers, for example?
For starters, prop firms are dealing with their own money, not someone else's. This alone allows prop firms to avoid the lion's share of regulations.
On top of that, many prop firms do not give traders real money to manage. In these firms, even traders who have passed evaluation and got access to a "live" account are actually still trading on a demo account with virtual capital. That means, technically, no trading or other financial transactions are taking place. Sure, the firm may replicate successful trades of the funded traders on the firm's real account. But, again, those are trades made by the firm itself with its own capital.
And in general, prop firms insist that they are not financial institutions and do not provide financial services. The most common way prop firms present what they are offering is "financial education". Some regulators find that questionable, and it is possible that in the future new legislation will demand Forex prop firms be regulated in a similar fashion to Forex brokers. But for now, prop firms for the most part manage to avoid regulations and still manage to stay within the bounds of the law.
Sometimes, the lack of regulations is not an entirely bad thing. It, at least in theory, makes getting funded by prop firms simpler and cheaper. At the same time, one should not forget the biggest problem with the lack of regulation — the lack of protections for traders. That means that traders are largely on their own when they have to decide whether to trust the specific prop firm or not. That makes the following question especially important.
Do you remember that it was earlier said that the answer to the question "are prop firms legit?" was "yes" but with the added qualification "in principle"? That means that, while prop firms are not scams by their nature, it does not mean that there cannot still be plenty of scammers posing as prop firms. There are many beginner traders among those attracted by prop firms, and such traders are especially tempting targets for scammers. So how to tell a good prop firm from a bad one? There are several considerations.
For starters, you can see what other traders say about the prop firm you are considering joining. Look for the firm on rating sites (such as TrustPilot). See if the firm is on lists of good prop firms (such as this one). Read what traders say about the firm.
Remember, though, that ratings sometimes can be manipulated, and reviews can be fake. If a review seems too positive, and especially if you see several such reviews written in a short space of time, you should be suspicious. At the same time, you should not listen to all negative reviews either. Traders can write negative reviews just because they have failed due to not understanding how prop firms work and what is required from traders that work with such firms.
Remember: just because a firm is popular and
In conclusion: stick to
Go to the prop firm's website. How good is it? A legit prop firm should have a
You should consider how strict are requirements and limitations for the evaluation period as well as for traders that have passed the evaluation. Either extreme is bad.
If it is impossible (or almost impossible) to fulfill the requirements imposed by the prop firm, then it is a scam aimed to collect fees for failed evaluation attempts.
But if requirements are very easy to meet it is also suspicious. After all, legitimate prop firms want to protect themselves from losses and therefore fund only the best of the best. Giving money to just anyone is obviously an unsustainable business model. That means if almost anyone can pass the firm's evaluation, then most likely the firm just wants to collect money from as many traders as possible and does not intend to pay anything back.
If requirements and limitations described on the site are unclear and confusing it is also a worrying sign. It means that the prop firm likely wants to use the lack of transparency to interpret the rules the way that would allow it to close the trader's account due to a perceived violation of rules without paying anything back.
Legit prop firms that want their traders to succeed should have good customer service. After all, online trading is very fast, and sometimes minutes or even seconds can mean the difference between profit and loss. Therefore, any issues a trader has should be resolved as quickly as possible. And if a firm has bad or
Probably the most burning question Forex traders will have about prop firms is "can I earn money trading with prop firms?". Well, the same as with the question "are prop firms legit?" the answer to this one is not as straightforward as yes or no. The simple answer is: yes, you can. In theory. But the sad truth is that you will probably will not.
As was said previously, prop firms only fund the best of the best. It means that more than 70% of traders fail to pass the evaluation test. And less than 10% of traders get to the profits split.
Opponents of prop firms use the extremely low number of successful traders as evidence that the whole model of prop firms' business is a scam. But proponents of prop firms deflect such criticism by pointing out that less than 10% of Forex traders are successful when they are trading with their own funds. It means that the chance for successful trading with prop firms is about the same as trading on your own.
But if you are a successful trader with a working profitable trading strategy, why would you want to join a prop firm? Especially considering that it is usually more profitable in the long term to trade on your own account than with a prop firm. The answer is the lack of initial capital. Not all traders, especially if they have just begun their career, have several thousand dollars to burn.
So, you are a trader with a working strategy who still needs bigger capital to trade. Does that mean you should consider joining a prop firm? Well, you should consider the requirements and limitations that the firm has for the evaluation period as well as for funded traders. Typically, prop firms value consistency over big profits. That means their rules usually severely limit the risk a trader is able to take without losing their account. Additionally, there is usually a profit target and a time limit, especially during the evaluation period. That means prop trading favors short-term strategies over long-term ones. Are you certain that your strategy falls within these parameters?
In general, you should consider trading with a prop firm only if all of the following statements are true:
There are additional considerations that can maximize your profits and minimize your risks when trading with a prop firm.
One of the most important things to remember is that you do not have to trade exclusively with one prop firm. In fact, experienced prop firm traders recommend joining as many trustworthy prop firms as you can. That way you do not put all of your eggs in one basket. And if one firm experiences trouble or turns out to be a bad one you will not lose all your money.
The fact that you do not have to trade with one prop firm exclusively means another very important thing. That the answer to the question "whether I should trade with prop firms or on my own" is not a binary one. You can very well trade both on your own account with your capital at the same time as trading with a prop firm. And indeed, seasoned traders advise you to have your own account in addition to accounts of prop firms.
This is the common strategy successful prop traders employ:
That way, you minimize the risk of losing all your funds in case some of the prop firms have troubles while growing your personal capital at the same time. And if you are indeed a successful trader (and to trade with prop firms you have to be one), you can ultimately grow your capital to the point you no longer need prop firms and can trade completely on your own.
You can look at our list of selected prop trading firms if you are having trouble choosing a prop firm to trade with.
If you want to share your opinion, observations, conclusions, or simply to ask questions regarding Forex prop firm trading, feel free to join a discussion on our forum.
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