Introduction
The online prop firm industry offers traders the opportunity to trade with a firm’s capital rather than their own, allowing them to leverage their skills without risking significant personal capital.
There are three main categories of online prop firms. The most popular firms are those that offer CFD trading, with most of them offering CFDs for forex, stock indices, commodities, and crypto. Several firms specialize in futures trading, and in the last couple of years, a firm was started specifically for stock traders.
In this article, we will address the key differences between the various types of online prop firms and explore some of the nuances that traders should consider when choosing which type of firm to trade with.
Forex and CFDs
The most common online prop firm business model is the one that offers Forex/CFD trading. Firms like FTMO, The5ers, and FundedNext offer traders either real or simulated capital to trade CFDs on their platform.
Some key benefits of trading CFDs are:
- Leverage: CFDs provide high leverage, allowing traders to control large positions with a relatively small amount of capital.
- Diverse range of markets: From Forex to stock indices, commodities, crypto, and even individual stocks, CFDs allow traders to speculate on the price movements of a wide range of markets from a single platform.
- High-profit potential: With a diverse range of markets to trade and high leverage, CFD trading offers traders an opportunity to achieve substantial returns on their investment.
A downside to trading CFDs is that, because CFDs are an over-the-counter (OTC) product, they are not traded on regulated exchanges. Therefore, the regulatory environment can vary significantly between regions. For instance, in the US, traders are not allowed to trade CFDs, which has caused several leading online prop firms to leave the US market.
Futures
Futures prop firms have been around for as long as CFD firms, but recently there has been a surge in the popularity of futures trading due to US regulations pushing several CFD firms to cease offering accounts to US-based traders. Some of the most prominent futures prop firms are Top Step, Apex, and My Funded Futures.
Futures trading is a bit different from CFD or stock trading. Futures contracts are standardized agreements to buy or sell a specific quantity of a commodity or financial instrument at a predetermined price at a specified time in the future. Traders can buy and sell futures contracts for various underlying assets such as commodities, cryptocurrencies, fiat currencies, energy, equities, interest rates, precious metals, and stock indices.
For traders outside the US (or other regions where CFD trading is prohibited), trading with a futures prop firm doesn’t offer any significant benefits over trading with a CFD prop firm. The risk parameters with futures prop firms are generally tighter, and the leverage is lower, which means the potential return on investment (ROI) of the evaluation fee is significantly lower.
Some key benefits of trading futures are:
- Available to US traders: Futures are traded on regulated exchanges in the US.
- Diverse range of markets: Traders can buy and sell futures contracts for various underlying assets such as commodities, cryptocurrencies, fiat currencies, energy, equities, interest rates, precious metals, and stock indices.
Stocks
Stock trading has not been possible with online prop firms until recently. In 2022, Trade the Pool launched its offering, a prop firm for stock traders.
Unlike CFD and futures firms, where traders often trade with simulated capital, traders are trading real stocks at Trade the Pool. This shift presents a new opportunity for stock traders to leverage a firm’s capital while trading in the actual stock market.
Some key benefits of trading stocks with a prop firm are:
- Real market exposure: Trading real stocks provides direct exposure to the stock market, unlike simulated capital used in many CFD and futures prop firms.
- A huge number of symbols to trade: There are more than 12,000 stocks and ETFs to trade at Trade the Pool, giving traders more opportunities to find their edge in the market.
- Bypass the PDT rule: Trading with a prop firm allows the trader to bypass the PDT rule, which may otherwise restrict them from trading stocks due to undercapitalization.
- PDT stands for ‘Pattern Day Trader’. In the US, there is a regulation that says that any stock trader using a margin account and placing four or more day trades in five business days should be considered a ‘Pattern Day Trader’. Pattern day traders are required to have at least $25,000 in their margin account, and if the account balance decreases below the $25,000 threshold, they are not permitted to trade again until they have restored the account balance to a minimum of $25,000.
- Potential for steady returns: Stock trading can offer more stable and predictable returns compared to the often high-volatility markets of CFDs and futures.
Funding Programs
There are a large number of online prop firms offering funding programs to aspiring traders. Most of these firms state that their traders are trading with simulated capital, with a rare few giving their traders real capital to trade. Whether trading simulated or real funds, the idea behind the business model is the same. Traders trade with the firm, and the firm manages the trading volume to generate a consistent profit; this means that prop firms should have the ability to monitor and analyze their trading volume, copy profitable traders’ trades to the real market, and hedge their exposure in the real market so that they can ensure a sustainable business model.
Unfortunately, as has been proven by several high-profile firms closing down due to a lack of liquidity, some online prop firms don’t have the desire or the required knowledge and infrastructure to manage their trading volume effectively and are in this business only to profit from traders failing evaluations. For this reason, traders must be careful about which firms they trade with, as not all online prop firms are built the same, and your financial and time investment is best spent with the most trustworthy firms first.
The firms that we consider to be most trustworthy in each category are:
- CFDs: FTMO, The5ers, and FundedNext
- Futures: Top Step
- Stocks: Trade the Pool
These are the longest-standing, most proven, and most respected online prop firms in each category.
Online prop firm funding models all have some similarities:
- The trader must pay a fee to be evaluated on their trading ability
- The trading evaluation requires the trader to reach a profit target
- There is a maximum overall drawdown limit, and in most cases, there is also a daily drawdown limit
- Once the trader passes an evaluation they are given a trading account with live or simulated capital, from which they can withdraw a split of any profits they earn
Below we will take a look at the profit potential with each category of firm, along with some key differences in the funding programs. The best way to compare profitability is to first agree on what a risk unit is for each account type, and for this, we will divide the maximum loss allowance by 20, which means that the trader will have 20R of risk available regardless of the category of prop firm they trade with. So if there’s a 10% maximum loss allowance then the risk per trade will be 0.5%, and for an account with a 6% maximum loss allowance, the risk per trade will be 0.3%. You can then consider how many R you make per month to calculate the potential profit you could make with each category of prop firm:
CFD Funding Programs
Starting with CFDs, as they’re the most common and well-known category of online prop firm.
- From approximately a $500 investment, a trader can access $100K of prop firm capital with up to 1:100 leverage and a 10% maximum loss limit. The trader will typically start with an 80% profit split.
- Each R = $500, with a $400 per R profit split to the trader (if the trader makes 10R profit, they will be paid a profit split of $4,000)
- The profit target to pass phases 1 & 2 is 13-15%, which is 26-30R.
- On most CFD funding programs, traders can pay a swap fee to hold trades overnight and over a weekend.
- There are news trading restrictions on most CFD funding programs.
- US traders must be wary of trading with CFD prop firms. The respected CFD prop firms stopped offering their services to US traders in the last few months.
Futures Funding Programs
Futures prop firms operate a little differently, with the trader being required to pay a monthly subscription fee for their evaluation account:
- With Top Step, traders can access $100K buying power for $99 per month until the evaluation is passed, plus a $149 activation fee upon passing the account. The account has a 3% maximum loss limit, the position size is capped at 10 contracts, and the initial profit split is 100%.
- Each R = $150. Until the trader earns $10,000, they receive a 100% profit split (e.g., a 10R profit results in $1500). After earning $10,000, the profit split becomes 90%.
- The profit target required to pass the evaluation is $6,000, which is 40R.
- With Top Step, traders cannot hold trades overnight, and there are no news trading restrictions.
- US traders can trade here without fear of regulatory issues.
Stock Funding Programs
With Trade the Pool, traders pay an evaluation fee instead of a monthly subscription. Rather than having a leveraged account, traders are given access to a portion of capital from a larger pool:
- For $475, traders can access $160,000 of buying power on a day trader account, with a $3,900 maximum loss limit and a 70% profit split.
- Each R = $195, with a $136.50 per R profit split to the trader (if the trader makes 10R profit, they will be paid a profit split of $1,365)
- The profit target to pass the evaluation is $7,800, which is 40R.
- This example is for the day trader account, which has strict restrictions on holding overnight positions.
- There are no news trading restrictions with Trade the Pool, but trades cannot be held through earnings reports.
Conclusion
The online prop firm industry allows traders to access large amounts of funding for a relatively small personal investment. With a diverse range of markets available in CFDs and futures, and a wide selection of stocks and ETFs, there is something to suit every trading style.
Ultimately, CFD firms offer the best overall profit potential. On average, CFD firms have higher maximum loss limits, higher leverage, and more capital available across multiple firms. However, due to regulatory issues, you cannot confidently trade with a CFD firm if you’re in the US; for US traders it makes sense to trade with a futures prop firm. For stock traders, the decision is simple because, wherever you are in the world, at the moment there is only one firm worth considering, and that’s Trade the Pool.
Whatever your trading style, whether you prefer the flexibility of CFDs, the security of futures, or the opportunities in stock trading, choose your firm wisely. At onlinepropfirm.com, we are committed to providing unbiased opinions about online prop firms, based on many years of trading experience, industry work, and thorough reviews. For more content and in-depth reviews of online prop firms, visit our website and YouTube channel!
