What Is a Prop Trading Firm and How Does It Work?

Have you ever wondered how elite traders access millions in capital without risking their own money? The answer often lies with proprietary (prop) trading firms. These financial powerhouses provide traders with the funds, technology, and infrastructure needed to trade at scale—but how exactly do they operate, and are they right for you?

In this comprehensive guide, we’ll demystify prop trading firms, explain their business models, and help you determine whether joining one could accelerate your trading career. We’ll also share essential tools like TradingView and TradeZella that can give you an edge in today’s competitive markets.

Understanding Proprietary Trading Firms

A prop trading firm (short for proprietary trading firm) is a company that trades stocks, forex, futures, or other financial instruments using its own capital rather than client funds. Unlike traditional brokerages that earn commissions from client trades, prop firms generate profits directly from market activities.

These firms typically employ or fund skilled traders who execute strategies ranging from high-frequency trading to swing trading. The most successful traders can earn substantial payouts while the firm provides the infrastructure and risk capital.

How Prop Trading Firms Differ From Retail Trading

Aspect	Prop Trading Firm	Retail Trading
Capital Source	Firm’s funds	Personal funds
Risk Exposure	Shared with firm	100% personal
Technology Access	Professional-grade platforms	Consumer platforms
Profit Split	Typically 50-90% to trader	100% to trader
Regulatory Requirements	Often stricter compliance	Basic account requirements

How Prop Trading Firms Work: The Business Model

The prop firm trading model revolves around three key components:

Capital Allocation: Firms provide traders with accounts ranging from $10,000 to millions, depending on experience and performance
Profit Sharing: Successful traders typically keep 50-90% of profits, with the remainder going to the firm
Risk Management: Firms implement strict drawdown limits and risk parameters to protect their capital

Common Types of Prop Trading Firms

Not all prop firms operate the same way. Here are the main variations:

Traditional Employment Model: Traders receive salary + bonus structure
Funded Trader Programs: Traders prove skills in evaluation challenges to earn funding
Revenue Share Model: Traders keep majority profits but pay for platform fees
High-Frequency Trading (HFT) Firms: Focus on algorithmic, ultra-fast trading strategies

Pros and Cons of Joining a Prop Trading Firm

Advantages:

Access to significant capital without personal financial risk
Professional trading infrastructure and technology
Potential for higher earnings through profit splits
Structured risk management framework
Collaborative environment with other skilled traders

Challenges:

Stringent performance requirements and targets
Limited trading strategy flexibility in some firms
Profit splits mean you don’t keep 100% of gains
Potential for sudden account termination if rules are violated
Some firms charge desk fees or platform costs

Essential Tools for Prop Firm Traders

Whether you’re trading with a prop firm or preparing for an evaluation, these tools can significantly enhance your performance:

TradingView: Advanced Charting Platform

TradingView offers professional-grade charting tools, technical indicators, and social features that help traders analyze markets more effectively. Many prop traders use TradingView alongside their execution platforms for:

Multi-timeframe analysis
Custom indicator creation
Pattern recognition tools
Real-time market data visualization

Pro Tip: TradingView’s premium plans offer faster data feeds and additional indicators that can give prop traders an edge.

TradeZella: Trading Journal & Analytics

TradeZella is a powerful trading journal specifically designed for serious traders. For prop firm participants, maintaining detailed records is crucial because:

Tracks performance metrics required by many firms
Identifies strategy strengths and weaknesses
Helps maintain discipline with trade reviews
Generates professional reports for firm evaluations

Why it matters: Most successful prop traders review their journals daily to refine their edge in the markets.

Frequently Asked Questions About Prop Trading Firms

Do you need a license to trade at a prop firm?

Most entry-level prop trading positions don’t require licenses, but some firms may need Series 34 (Retail Forex) or Series 57 (Securities Trader) licenses for certain instruments. Always check with the specific firm.

How much do prop traders make?

Earnings vary dramatically based on performance. Top traders at major firms can earn seven figures annually, while beginners might make $50,000-$100,000. Funded trader programs typically offer 50-90% profit splits.

What’s the difference between a prop firm and a hedge fund?

Prop firms trade their own capital with in-house traders, while hedge funds manage external investor money. Hedge funds face stricter regulations and typically have higher minimum investments.

Can you trade cryptocurrencies at prop firms?

Some modern prop firms now offer crypto trading, though most still focus on traditional markets like forex, stocks, and futures. Always verify which instruments a firm supports before joining.

Conclusion: Is a Prop Trading Firm Right for You?

Prop trading firms offer a unique pathway for skilled traders to access substantial capital and professional resources. While the profit splits and performance pressures aren’t for everyone, these firms can be ideal for disciplined traders who want to scale their strategies without personal financial risk.

Before joining any proprietary trading firm, carefully research their:

Funding and profit split terms
Risk management rules
Trading style compatibility
Reputation in the trading community

Want to test your skills before applying? Check out our guide on passing prop firm evaluation challenges to prepare effectively.

Ready to Trade With a Prop Firm?

FundedScore helps traders evaluate and compare the best proprietary trading firms. Start your funded trading journey today