What is a Prop Firm?
What is a Prop Firm?
Mechanism, Features, Advantages, and Precautions Explained Simply
Table of Contents
2. Features of Challenge-Based Prop Firms
3. Mechanism of Challenge-Based Prop Firms
Prop firms (Proprietary Trading Firms) are a new form of trading that has been gaining increasing attention in recent years. Particularly in the model called "Challenge-Based Prop Firms," traders can challenge themselves in a professional trading environment without using their own funds.
We will organize the basic mechanism, features, advantages, and disadvantages of prop firms, and carefully introduce them, including a perspective from a Japanese challenge-based prop firm.
1. What is a Prop Firm?
Prop firm (Proprietary Trading Firm) refers to a company that trades in the financial markets using its own funds. In this structure, traders trade using funds provided by the prop firm, without using their personal capital, and receive a portion of the profits earned as compensation.
In this model, alongside pursuing profits through trading, emphasis is also placed on trader development and skill enhancement. While prevalent globally, "Challenge-Based Prop Firms" are gaining attention as a new form in Japan.
2. Features of Challenge-Based Prop Firms
Funding Provision
Traders trade using virtual trading funds (demo accounts) provided by the prop firm without risking their own capital. This is a fully funded model, and trader losses do not result in actual financial burden.
Education and Support System
Many challenge-based prop firms provide educational content and mentoring systems to support trader growth. Programs are available for various levels, from beginners to experienced traders, enabling the acquisition of practical skills.
Strict Risk Management Rules
Risk management is the core of prop firm operations. Clear loss limits, lot sizes, position sizes, etc., are set for each trader, requiring disciplined trading. This establishes a sustainable and reproducible trading environment.
Profit Sharing Model
Profits generated by traders are shared with the prop firm based on a predetermined profit split ratio. The profit share is generally around 60-90%, allowing for high compensation depending on performance.
3. Mechanism of Challenge-Based Prop Firms
Challenge-based prop firms aim to discover and develop skilled traders and are structured around the following process.
Challenge Process (Evaluation Period)
Traders first undergo a "challenge" using a demo account and must prove stable performance under prescribed risk management rules for a certain period. This provides funding opportunities only to selected traders.
Provision of Training Programs
Training programs are available to acquire diverse skills necessary for professional traders, including trading strategies, mental management, and market analysis.
Trading Environment Development
Prop firms develop professional-grade trading infrastructure, including real-time market data, high-performance charting tools, and backtesting functions. Traders can fully demonstrate their abilities in this environment.
Funding Provision After Evaluation
Traders who meet certain criteria are given the opportunity to manage virtual funds (demo environment) based on the prop firm's judgment. In this stage, trading is conducted under conditions as close as possible to the real market, and profit-sharing compensation is generated.
4. Profit Sharing Mechanism
One of the biggest attractions of prop firms is the "profit sharing system." Profits generated by traders are shared between the trader and the firm according to a preset profit split ratio.
The profit split varies depending on the trader's experience, trading performance, contract terms, etc. It is generally around 60% to 90%, which can be considered a very high level of compensation for traders.
5. Advantages and Precautions of Challenge-Based Prop Firms
Key Advantages
No Personal Capital Risk
Traders do not need to invest their own funds and can gain professional experience through trading with virtual capital (demo account).
Skill Improvement and Career Potential
The education and evaluation systems provided by the firm allow traders to hone practical skills and develop a professional mindset.
Community and Networking
Many firms also have communities where traders can interact and exchange information, providing an environment for mutual improvement.
Precautions (Points to Consider)
Psychological Pressure
Many traders experience mental pressure in an environment with profit targets and loss limits.
Limitation on Freedom
Trading is subject to rules set by the firm, which may impose certain restrictions on your style or strategy.
Cannot Obtain Full Profit
Since it's a profit-sharing model, it's important to note that not all of your efforts directly translate into earnings.
Understanding these factors and choosing a firm that aligns with your goals and style is the first step towards success.
6. Summary
Challenge-based prop firms are a very attractive option for traders aspiring to grow in the financial markets. The ability to gain trading experience without using personal capital is a significant advantage for those aiming to become professionals.
On the other hand, there are also strict risk management rules and mental burdens. The key is to understand your own strengths and weaknesses and to utilize the prop firm environment to its fullest potential.
Fundora, as a challenge-based prop firm originating from Japan
fairly evaluates your skills and provides a trading environment with substantial demo funding.
Fundora offers an evaluation process where you can aim for professional qualification in as little as 5 days, allowing you to start serious trading early.
We also provide 24/7 bilingual support, so you can resolve questions and concerns anytime, which is a key advantage.
Why not aim to become a professional trader with Fundora?
View Fundora Plans - Become a Pro Trader in as Little as 5 Days
- Frequently Asked Questions
- Are there any qualifications or skills required to join a prop firm?
No special qualifications are required. What is needed is a certain level of trading knowledge and a mentality capable of managing risk. Fundora also offers extensive educational content, making it possible for beginners to start.