What Is a Funded Trading Account?

The concept of a funded trading account is uniquely tied to the proprietary trading space, allowing skilled traders to execute traders using the capital of the trading firm without risking their own money.

This is a model which has grown in popularity in recent years, but while these accounts offer you the ability to trade and participate in the market without much personal financial risk, there are still some pitfalls and things you need to be aware of before committing to trading this way.

How Funded Trading Accounts Work

In essence, a funded trading account is a partnership between a proprietary trading firm and a trader who qualified for it. 

While there are a few emerging firms on the market today offering instant funding, the vast majority of them still have a qualification process, most commonly in the form of challenges.

Proprietary trading challenges are usually one-phase or two-phased, and during them the firm assesses your trading skills, consistency and risk management abilities, by following your trades in a virtual trading space under their own specific set of rules and conditions.

These guidelines most commonly take the form of strict profit targets, and daily and total drawdown limits, and breaking any of the rules usually leads to the termination of your account, making this type of trading much less suitable for beginners.

Those that do qualify, however, will be granted access to a funded account, in which the trading firm assumes the risk and traders earn a percentage of the profits they generate.

Because the profit split offered here is on average around 70-80% today, and due to the fact that most firms have scaling plans which can allow you to trade with millions of dollars, the earning potential with a funded account is extremely high.

Which Funded Trading Account Type to Pursue

As we mentioned earlier, different firms offer different types of funded trading accounts, and beside the rules, challenges and other features, the most important thing to consider before committing to a firm are the types of trading instruments that you can trade with.

In general, the majority of firms are currently mainly focused on Forex proprietary trading, where you trade on the movements of the world’s leading fiat currencies, like the US Dollar, the British Pound and so on. 

This is a good choice if you want to trade in the most stable possible market, as movements here are rarely sudden or drastic, and a good number of firms offer a high leverage for you to trade with, especially when compared to other instruments.

For example, if you wanted to pursue a cryptocurrency proprietary trading account, you will find that most firms today offer a 1:2 leverage on these trades, while leverage on Forex pairs sometimes goes 1:50 or even higher in some cases. 

The same goes for trading on stocks, which also usually comes with as low leverage as does with crypto.

Another popular option in the prop trading space are futures, where you can buy and sell contracts for commodities like crude oil, precious metals and so on.

As you can see, the choices here are wide and if you want to focus on a specific trading instrument, it's best you choose a firm which has the most benefits and potential for profit in that sector.

Advantages and Disadvantages

Funded trading accounts offer numerous benefits but also come with notable challenges.

• The biggest advantage is of course the access to outside capital, which also reduces personal financial risk. 
• Secondly, the clear rules and guidelines set by proprietary trading firms offer a structured trading environment, rewarding traders that show discipline and the ability to manage risk properly.
• Funded accounts usually have scaling capabilities, providing you with the opportunity to trade with massive accounts with multiple millions of dollars in some cases.
• The firms also have numerous mentorship programs, advanced trading platforms and analysis tools, educational resources and coaching features, helping traders hone their skills. 
• Last but not least, the barrier of entry here is low, so you won’t need much in personal savings to start trading with large amounts of capital.

Now let’s cover some of the biggest disadvantages.

• The biggest obstacle here is regulation, or lack thereof. Many proprietary trading firms aren’t regulated, allowing potential for scams.
• Secondly, the trading rules set by some firms can be very strict, and you might lose your account and will have to pay the upfront fee again if you break one of the core funded account rules.
• Some firms will also restrict how often you can withdraw profits, or will have stricter rules concerning the minimum trading days.
• Lastly, one of the biggest disadvantages with this type of trading is of course the pressure that traders feel, due to the fact that they must meet profit targets within set timeframes, often leading to poor decision-making and stress.

How to Become a Successful Funded Trader

The truth is that the majority of traders, regardless of the trading space they trade in, lose money in the long run. Still, there are a lot of success stories, too, and things that you can do to set yourself up for success as well.

Firstly, make sure that you choose a reputable proprietary trading firm, which has clear, fair and transparent rules. Research what other traders have to say about it, how it handles withdrawals and familiarize yourself with the evaluation criteria before spending your hard earned money.

Secondly, you should always have a clear trading plan in mind. Choose those programs which align with your trading style and practice with a demo account first in order to familiarize yourself with the trading platform and to test out different proprietary trading strategies.

You should also take advantage of mentorship opportunities and coaching programs offered by the firm, as well as their tools for fundamental and technical analysis.

When you do finally commit to a funded trading account, always keep in mind the rules you must follow, and trade responsibly. Discipline is the key to success in trading, so always make sure to avoid emotional decisions, and be open to monitor and review your traders to identify how you can adjust your strategy if needed. 

In Conclusion

All in all, funded trading accounts are a viable new path for traders to access financial markets and trade with large amounts of capital with minimal personal financial risk. We would not recommend this type of trading for beginners due to strict rules and requirements, but skilled traders can see success with the proper approach and disciplined trading practices.