The foreign exchange or forex market is the largest and most liquid financial market in the world that attracts traders of all experience levels. Forex prop firms reduce the barriers that traders face during trading and provide them with a solution so they can easily start their trading journey. Forex prop firms provide traders with the amount of capital that they need to start their trading journey. In return for this capital prop, firms take a specific percentage of their profit. Whether a trader is just starting or an experienced professional, they need access to capital and trading platforms to participate in the market. Two primary options exist for forex traders like proprietary (prop) trading firms and traditional brokers. Let’s see in detail about prop firms and what is the difference between a forex prop firm and traditional brokers so traders can choose the best approach based on their goals, trading style, and risk tolerance.
What are Forex Proprietary Firms?
Forex proprietary firms or forex prop firms provide traders with access to capital in exchange for a share of the profits. These firms check traders’ skills based on specific criteria, usually requiring them to pass a 2 step evaluation before giving them funded accounts.
How Forex Prop Firms Work
- Firms take an evaluation phase in which traders must prove their skills by passing a challenge or evaluation process. This phase includes achieving a set profit target while following strict risk management rules.
- When traders successfully complete the evaluation phase, then they receive access to a funded account that helps them to trade with the firm’s capital rather than their own.
- Prop firms work on profit splits. Instead of earning money individually from market performance, traders share their profits with the prop firm. The percentage split is different between firms but mostly traders can retain 70% to 90% of the profits.
- Risk management rules that prop firms impose such as daily drawdown limits, maximum loss limits, and position size restrictions to manage risk. These rules help traders to protect firms’ capital.
Benefits of Trading with a Prop Firm
- Access to Capital: Traders can trade larger accounts without needing significant personal capital.
- Limited Personal Risk: Losses are typically limited to the evaluation fee, rather than personal funds.
- Professional Growth: Traders gain access to structured environments and risk management guidelines, improving discipline.
- No Leverage Concerns: Since traders use the firm’s capital, they do not face the risk of margin calls on personal funds.
Downsides of Forex Prop Firms
- Evaluation challenges are a difficult task for traders. Passing the evaluation phase can be difficult because traders have to follow strict risk management rules to achieve this profit target.
- Profit splits as traders do not retain 100% of their earnings. This split means traders have to share this profit with the firms that most of the traders do not prefer.
- Rules and restrictions as prop firms enforce strict trading rules that can limit flexibility and make it difficult for traders to pass a challenge.
What are Traditional Brokers?
Traditional brokers are financial service providers that help individual traders to access the forex market. These brokers provide trading platforms, liquidity, and leverage. Traders deposit their own funds and take complete responsibility for profits and losses.
How Traditional Brokers Work
- Account opening that traders must open with brokers and deposit funds to start trading.
- Leverage & margin trading because brokers provide leverage to amplify potential profits and losses. Leverage ratios vary and range from 1:30 to 1:500 and depend on regulations.
- Trading costs as brokers make money through spreads, commissions, and sometimes overnight swap fees.
- No evaluation is required through traditional brokers. unlike prop firms, traders do not need to pass a challenge to start trading.
Benefits of Trading with a Traditional Broker
- Full control over trading as traders have complete autonomy in making trading decisions.
- No profit splits because all earnings belong to the trader.
- Diverse market access as brokers typically provide forex, commodities, indices, and cryptocurrencies.
- More trading flexibility and no restrictions on trading styles or strategies.
Downsides of Traditional Brokers
- Personal capital risk because traders risk their own money and losses can be significant.
- Leverage risks as you know high leverage can amplify losses and lead to margin calls.
- Broker reliability concerns are very important as some brokers engage in unethical practices like price manipulation or widening spreads during volatility.
Which Option Is Best for You?
Forex Prop Firms Suit those traders who have strong risk management skills and can pass evaluations easily. It’s also the best option for those who have limited capital but they want to trade larger accounts. Traders who like structured trading rules can also use forex prop firms.
Traditional brokers suit those traders who want full control over their strategies and funds and want to take on personal risk for unlimited earning potential. This is also best for those who prefer not to share profits with a third party.
