Prop Firms: Instant Funding vs. Evaluation
If you are looking for a way to grow your funds through profitable trading, one option is to start out at a proprietary trading firm or prop firm. The firm allows you to trade its funds, and you and the firm share the profits from your trades.
When trading with a prop firm, there are two types of accounts you can get: instant funding accounts and evaluation accounts. Which is better? In this post, we will explore the differences between these two types of prop firm accounts and their pros and cons.
What is an evaluation account?
With an evaluation account, you do not pay a fee to start trading right away as you do with an instant funding account. Instead, you must pass an evaluation to assess your skills. Sometimes there is a fee involved in taking the assessment.
To start, the firm may ask you to share your existing Forex trading records. Then, they will assign challenges for you to complete in real-time. If they are satisfied with your performance, they will welcome you onboard as a proprietary trader.
Pros of evaluation accounts
- If you have to pay a fee, it will likely be lower than the fee you would pay for an instant funding account.
- There may be no fee at all in some cases. It varies from firm to firm.
- If you fail the evaluation, you might be able to try again (sometimes even for free).
- The profit split for an evaluation account may be more favorable to the trader than it would be for an instant funding account.
- The firm may allow you to trade a larger amount of capital than it would if you did not prove yourself through an evaluation.
- There is simply a higher level of trust from a firm when they start working with you after an evaluation, as opposed to going in blind with instant funding. This may lead to a smoother and more rewarding relationship from the get-go.
Cons of evaluation accounts
- You have to jump through more hoops to get started trading.
- Some people may find the evaluation process itself to be stressful, especially as there are time constraints around proving your performance. In some cases, this extra pressure might lead you to underperform.
- Depending on your trading strategies and returns, you might not be able to pass certain timed evaluations, even if you are a profitable trader.
- If there is an evaluation fee, and you repeatedly fail the evaluation, you might end up paying the fees multiple times (that said, the ROI is often still higher with the evaluation account model, even when this happens).
With an evaluation account, you have the chance to earn higher returns early on because you have access to more of the firm’s funds for trading. But passing the evaluation itself can be a challenge.
What is an instant funding account?
An instant funding account can be contrasted with an evaluation account. Whereas an evaluation account requires an evaluation before you can qualify and start trading, an instant funding account does not. You skip the evaluation process and instead pay a fee. You then get to jump right into trading with the prop firm.
Pros of instant funding accounts
- There is no evaluation to worry about. You cannot “fail.” You just apply for an account, pay the fee, and get access.
- You also get to skip the time involved with passing an evaluation, and begin trading right away. That means you can start profiting sooner.
- You may be able to choose between several tiers of capital/fees, so you can pick whatever works for you.
Cons of instant funding accounts
- There is no transition into trading with the prop firm like you get through an evaluation period. Going straight to trading large amounts of real money might overwhelm some traders.
- You have to pay a fee. It will probably be higher than the fee for an evaluation account (which sometimes have no fees, remember).
- You will probably have access to a lower amount of capital than you would if you had passed an evaluation.
- The profit share you get from trading will likely be lower than it would with an evaluation account.
- Due to the smaller account starting out and the lower profit share, it will take you longer to grow your account and earn more substantial profits.
- In general, the prop firm you are trading with will have less trust of you in the beginning, so the relationship may not be as solid starting out.
An instant funding account is more expensive in the beginning due to the fee, plus you will grow it more slowly than an evaluation account because of lower profit share and a smaller account. But you do get to begin trading rapidly and skip all the hassles of getting evaluated.
Instant funding vs. evaluation: which is right for you?
As you can see, there are significant pros and cons to both options. So, we cannot definitively say that an evaluation account or an instant funding account is “better” than the other. It comes down to evaluating your needs and goals as a trader.
One key consideration should be the simple reality of whether you think you can pass an evaluation.
Before you decide to try an evaluation with a prop firm, research to find out what the challenge(s) include.
Then, compare those challenges against the performance you can typically expect from your own trading method. How likely is it you will pass on your first try? Your second? Your third?
Say, for example, that the evaluation challenge is to generate 10% within 60 days. If your trading method is sufficient to make that happen, then it makes sense to go for it.
But maybe your trading method generates between 2-4% per month. Trying to get above 10% is going to be a tough battle, and you might not even be able to do it.
There is nothing wrong with making 2-4% per month, and you deserve to trade with a prop firm. So, instead of forcing yourself to pass an evaluation that simply is not suitable for your trading method, it would make a lot more sense to get an instant funding account and bypass the whole hurdle.
All of that said, you can find some evaluation accounts at certain prop firms that do not have a time-based test. One of those might be an option that would work for you if you accumulate profits at a lower margin.
Consider instant funding if...
- You have a trading method that generates the types of results we discussed above. If you are profitable, but not at a high enough margin to clear the evaluation requirements, then an instant funding account is a better fit.
- You are a beginning Forex trader without a well-established track record that you can share with a prop firm as part of an evaluation process.
- You do not mind paying the fee for an instant funding account.
- You are patient with building your account a bit more slowly than you would with the higher ROI that goes with an evaluation account.
- You want to begin prop firm trading immediately without jumping through hoops.
- You feel that the evaluation process would be stressful, anxiety-inducing and difficult for you psychologically.
Consider evaluation if...
- Your trading method can produce results that are sufficient to pass the evaluation (even if it takes you a few tries).
- You are comfortable with the fees, if they exist.
- You have been trading long enough to have a record of your wins and losses that you can share with the prop firm. Ideally, they will be results from a live account, but a demo account may be acceptable as well for some firms.
- You have the time and patience to get through the evaluation process, and it does not put you off too much psychologically. You might feel pressured by it, but you also feel comfortable with your ability to cope with that feeling of pressure.
- You want the best return on investment, and appreciate that an evaluation account will give you a better profit split and more funds to trade.
There is no right or wrong answer for which is better, an instant funding account or an evaluation account.
Do an assessment of your own trading method, goals and psychology, weighing the pros and cons of both options carefully.
You probably already have a pretty good intuitive idea of which type of account would serve you best, but it makes sense to put some strategic thought into making your selection.
Thankfully, whichever type of prop firm account you pick, it is hard to go wrong. If you have a reliable trading method that can generate consistent profits, either an instant funding account or an evaluation account can help you grow your Forex earnings.
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