Prop firms: trading someone else's money, for a fee

Spend ten minutes on trading social media and you will see ads for "funded accounts": pay a few hundred dollars, pass a test, and trade a $50,000 or $100,000 account, keeping most of the profits. These are retail proprietary trading firms, usually just called prop firms. They are neither the scam their critics claim nor the shortcut their marketing implies. Here is the honest structure.

Two very different things called "prop firm"

Traditional prop firms hire traders as employees or contractors, train them, give them the firm's capital and tools, and split profits. You are selected, often through interviews and a training period, and you may be paid a base salary. These firms make money when their traders make money. Getting in is competitive and they are mostly in cities with real trading desks.

Retail evaluation firms (the ones in the ads) sell an evaluation: you pay a fee, trade a simulated account under rules, and if you meet a profit target without breaking the rules, you get a "funded" account. Most funded accounts are also simulated; the firm pays you a share of your simulated profits from its own revenue, which is overwhelmingly the evaluation fees paid by everyone who failed. Some firms do copy a portion of funded traders' orders into a real account; many do not.

Everything below is about the second kind, because that is what you will be offered.

How the evaluation works

Typical terms (they vary a lot, and change often):

Term	Typical value
Evaluation fee	$50 to $600, sometimes recurring monthly until you pass
Simulated account size	$25,000 to $300,000
Profit target	6% to 10% of account size
Maximum daily loss	3% to 5%
Maximum total drawdown	6% to 12%, often "trailing" (it rises with your peak balance)
Time limit	None to 30 days
Profit split once funded	70% to 90% to the trader
Instruments	Futures at most firms; forex/CFDs at others; stocks rarely
Consistency rules	No single day may be more than X% of total profit

The trailing drawdown is the rule that catches most people. If your $50,000 account goes to $53,000, your maximum loss level rises to $53,000 minus the drawdown allowance, and it does not come back down. Give back a modest amount after a good run and you have failed the evaluation even though you are still in profit. Read this rule three times before paying for anything.

The business model, plainly

Most people who buy evaluations fail them. Firms rarely publish pass rates; the estimates that have surfaced through regulatory actions and firm disclosures tend to land in the single digits to low teens for passing, and lower still for actually receiving a payout. The fees from those who fail fund the payouts to those who pass. It is a business built on the fact that most traders lose, which is the same fact every other part of this course has been preparing you for.

That is not automatically dishonest. A firm that pays out reliably, states its rules clearly and does not change them mid-stream is selling a legitimate product: leveraged exposure to your own skill for a fixed, known cost. A firm that changes rules after you pass, delays payouts, or has a payout policy that depends on a discretionary review is selling something else. Several large firms have collapsed or been cut off by their platform providers; do a search for the firm's name plus "payout" and "review" before paying.

Honest pros

Defined risk. The most you can lose is the fee. Compared to funding a $10,000 futures account and blowing it up, losing $150 on a failed evaluation is cheap tuition.
Forced discipline. Daily loss limits and drawdown rules are exactly what a beginner should impose on themselves and usually does not.
Leverage without a margin call. A $5,000 trader can trade contracts that would be reckless in their own account, because the downside is capped at the fee.
No PDT rule because it is simulated and mostly futures.

Honest cons

Rules encourage overtrading and rushing. A profit target with a time limit pushes you toward exactly the behaviour that loses. Consistency rules and trailing drawdowns are designed around the ways traders typically fail, which means passing requires steadiness most beginners have not yet built.
It is a simulation. Fills are often better than real, and your emotional state trading fake money for a real fee is different from trading real money.
Fee treadmill. Buying evaluations repeatedly after failing is a real pattern. A $150 fee, six times, is $900 that could have been a small real account.
Counterparty risk. Your "funded account" is a promise from a private company with no regulator behind it in most jurisdictions.
Regulatory uncertainty. Some jurisdictions have begun examining whether these products are unregulated derivatives or gambling; firms have been ordered to stop offering services in certain countries.

Key idea: A retail prop firm sells you a rules-based test for a fee, and pays passers out of the fees of failers. It can be a cheap way to trade size with capped downside, but only if you already have a repeatable process; buying evaluations to find out whether you have one is expensive.

When it makes sense

A prop evaluation is reasonable when all of the following are true:

You have at least three months of journaled trading (paper or small real) with a positive expectancy and a maximum drawdown well inside the firm's rules.
You understand the trailing drawdown and consistency rules and have checked your own results against them.
You have researched the specific firm's payout record within the last few months.
You can afford to lose the fee without it changing your plans.
You are trading it exactly as you would trade your own money, not swinging for the target.

If any of those are false, the evaluation is not a shortcut; it is a slower, more expensive way to learn the lesson that Module 8 teaches for free.

Try it: Take the rules from any one prop firm's evaluation page and apply them to your own last 30 days of (paper) trading. Would you have hit the daily loss limit? The trailing drawdown? The profit target? Write down the day you would have failed, if any. That single exercise is worth more than the evaluation itself.

Recap

Traditional prop firms hire traders; retail "prop firms" sell paid evaluations for simulated funded accounts.
Passers are paid mostly from the fees of the majority who fail; pass and payout rates are low.
The trailing drawdown and consistency rules are what fail most candidates; read them before paying.
Pros: capped downside, enforced discipline, size without margin calls. Cons: rushed rules, simulation, fee treadmill, no regulator.
Only buy an evaluation once your own journal shows you already meet its rules.