Prop trading (proprietary trading) is a model where a firm provides traders with capital to trade in exchange for a share of the profits. In the modern retail context, prop firms (such as FTMO, Topstep, or Apex Trader Funding) offer funded accounts to traders who pass evaluation challenges, allowing them to trade with the firm's capital while keeping 70-90% of the profits they generate.
Modern prop trading typically follows a three-step process: (1) Evaluation, where traders must meet profit targets while respecting strict risk rules (maximum drawdown, daily loss limits) within a specified timeframe; (2) Verification, a second phase with similar or relaxed rules to confirm consistency; (3) Funded account, where the trader receives a real (or simulated) funded account and trades under the firm's risk parameters. Common rules include maximum drawdown limits (5-10%), daily loss limits (2-5%), and restrictions on trading during news events. Traders typically pay a one-time fee for the evaluation.
A trader pays $150 to enter a $50,000 futures evaluation with Apex Trader Funding. The rules require reaching a $3,000 profit target with a maximum trailing drawdown of $2,500. The trader uses proper position sizing (risking $500 per trade) and a 1:2 risk-reward strategy. After 15 trading days, they meet the target and receive a funded account. They now trade with $50,000 in buying power and keep 80% of profits they generate, while the firm retains 20%.
Prop trading has democratized access to significant trading capital. Traders who cannot afford to fund large accounts themselves can now trade with $50,000 to $300,000+ in capital after passing an evaluation. However, the strict risk rules (especially drawdown limits) mean that strong risk management skills, proper position sizing, and emotional discipline are essential. Most traders who fail prop firm challenges do so because of poor risk management, not lack of market knowledge.