What is a prop firm? A simple guide from H2T Funding

In this guide, you will learn what prop firms are, how they operate, the key rules to follow, their pros and cons, and tips to choose a reliable firm. 

Let’s begin with the basics.

1. What is a prop firm?

A proprietary trading firm, often shortened to prop firm, is a company that provides traders with capital to trade financial markets. Unlike trading with your personal account, where you risk your own savings, a prop firm allows you to trade with the firm’s money under agreed-upon rules.

At its core, a prop firm is designed to evaluate your trading skill and discipline. Once you pass an evaluation, usually a simulated or live challenge, you receive a funded account where profits are shared between you and the firm.

What is a prop firm?

The key differences compared to self-funded trading include:

• Capital access: You may control accounts ranging from $10,000 to over $200,000 without depositing personal funds.
• Risk sharing: The firm absorbs losses beyond the defined drawdown limits, while you focus on consistent performance.
• Profit splits: Traders keep a large percentage of profits (often 70–90%) while the firm takes the rest as compensation for providing capital and infrastructure.

According to Investopedia (2024), prop trading “enables firms to profit from their traders’ expertise while giving individuals the opportunity to scale beyond their personal capital.” This model is what makes prop firms attractive to skilled but underfunded traders.

2. How prop firms work today

Modern prop firms operate on a model that balances opportunity for the trader with risk control for the firm. To understand “what is a prop firm trading” in practice, you need to look at how they structure evaluations, funded accounts, payouts, and scaling options. 

To access a funded account, most traders must first pass an evaluation program. This stage is designed to test consistency, discipline, and risk management rather than chasing high returns.

2.1. Evaluation process

Typically, traders join a one-step or two-step evaluation.

• One-step challenge: A single phase where you must meet profit targets without breaking drawdown rules.
• Two-step challenge: A more gradual model with smaller targets spread across two phases.

In my experience, scalpers often prefer one-step programs because they allow for quicker results, while swing traders may find two-step challenges more forgiving.

2.2. Funded account access

After passing the evaluation, you gain access to a funded account. The account size depends on the plan you purchased, usually ranging from $25,000 to $200,000. The firm continues to monitor your risk, but you trade live markets with real potential to earn payouts.

2.3. Profit payout

Prop firms share profits with traders on a fixed schedule, often monthly or bi-weekly. For example:

• Payout ratio: 70% to 90% of profits kept by the trader
• Payment methods: Bank transfer, PayPal, or crypto, depending on the firm
• Frequency: Most firms allow withdrawals after the first 30 days, then on a regular cycle

2.4. Scaling plans

Some firms reward consistent traders by scaling the account size. If you meet profit targets without breaking rules, your funded account can grow, sometimes doubling over time. This approach allows disciplined traders to eventually manage six-figure accounts without personal capital.

3. Core risk rules decoded

Before exploring the rules, it helps to revisit the question “What are prop firms?”. In essence, they are companies that trust traders with capital but control risk through strict guidelines. Every prop firm enforces rules to protect its funds, and these rules are often stricter than what traders might apply in a personal account.

3.1. Daily drawdown

This rule limits how much your account can lose in a single trading day. For example, if your daily drawdown is 5% on a $100,000 account, you cannot lose more than $5,000 in one day. This prevents traders from taking oversized risks after a losing streak.

3.2. Max or trailing drawdown

Prop firms usually apply one of two types of overall loss limits. These define how far your account can fall before the firm cuts off trading access:

• Max drawdown: A fixed limit on total losses from the starting balance or peak equity.
• Trailing drawdown: Moves upward as your account grows. If you increase the balance, the allowed drawdown also increases, but it never goes back down.

Many traders find trailing drawdowns tougher, since they tighten risk as profits grow. 

I once worked with a colleague who passed his evaluation but failed the funded account because he did not adapt to the trailing rule. It showed me how critical it is to adjust position sizing as account equity changes.

3.3. Other rules to note

Besides drawdowns, prop firms may impose:

• Consistency rules: Requiring steady profits instead of one large winning trade
• News restrictions: Blocking trades during major economic announcements
• Minimum trading days: Ensuring traders do not pass with only a single trade

These rules are not meant to limit potential but to ensure that traders can operate responsibly. As the CFTC (2023) emphasizes, proper risk management is the cornerstone of sustainable trading.

4. How prop firms make money and what it costs you

Prop firms are not charities. They make money by sharing in trader profits and charging various fees. Understanding these costs is essential before committing to any program.

4.1. Profit split model

The main way prop firms earn is through profit sharing. After you trade a funded account, the firm takes a percentage of profits in exchange for providing capital and infrastructure. For example, many firms keep 10–30% while you retain the rest. The more consistently you trade, the more both sides benefit.

4.2. Evaluation and reset fees

Most firms charge upfront fees for the evaluation stage. These can range from $100 to several hundred dollars, depending on account size. If you break the rules, you may need to pay a reset fee to try again. While these fees are non-refundable, they fund the firm’s risk management process.

4.3. Platform and data costs

Besides direct trading fees, some firms pass along charges related to technology. These may include:

• Trading platform access: Monthly fees for platforms such as MetaTrader or TradingView add-ons.
• Market data subscriptions: Real-time quotes, especially in futures trading, often require a separate payment.
• Administrative costs: Certain firms charge for account maintenance or withdrawal processing.

These costs might seem minor, but they add up over time. I’ve seen traders underestimate platform fees, only to realize they were eating into monthly profits. Careful budgeting is just as important as trading discipline.

How prop firms make money

As CME Group (2023) highlights, professional traders must treat technology and data costs as “part of the business of trading,” not optional extras.

5. Pros and cons of joining a prop firm

Joining a prop firm can open doors for traders who want to scale quickly, but it also comes with trade-offs. Weighing the advantages and disadvantages will help you decide if this path fits your trading style.

5.1. Advantages

Prop firms provide several benefits that attract both beginners and experienced traders:

• Access to larger capital: Trade accounts far bigger than what most individuals can fund on their own.
• Lower personal risk: You risk only the evaluation fee rather than your life savings.
• Structured discipline: Risk rules encourage better money management habits.
• Scaling opportunities: Consistent traders may double or even triple their account sizes through firm scaling plans.
• Learning environment: Exposure to professional risk management helps build long-term skills.

5.2. Disadvantages

There are also downsides that every trader should consider carefully:

• Strict rules: Breaking a single rule can result in losing your account, even if you are profitable overall.
• Upfront costs: Evaluation and reset fees can add up, especially if you fail multiple times.
• Limited freedom: Restrictions on strategies, news trading, or holding positions overnight may not suit all styles.
• Profit sharing: Even with high splits, you still give up a portion of your profits to the firm.
• Psychological pressure: Knowing you trade with someone else’s capital can increase stress.

Pros and cons of joining a prop firm

As Alexander Elder wrote in Trading for a Living (2014), “trading without discipline is gambling.” Prop firms reinforce that discipline, but only traders comfortable with firm rules will thrive.

6. Who should consider a prop firm (and who shouldn’t)

Prop firms are not for everyone. The model works well for certain traders, but it can frustrate others who are not ready for strict oversight.

Prop firms are a good fit for:

• Traders with skill but limited personal capital who want access to larger accounts.
• Disciplined individuals who can respect daily drawdown and maximum loss limits.
• Traders seek structure and accountability to improve consistency.
• Those aiming to scale gradually into six-figure accounts without personal financial risk.

Prop firms may not be suitable for:

• Beginners who have not yet tested strategies on demo accounts.
• Traders who dislike strict rules or prefer absolute freedom in their methods.
• Highly aggressive risk-takers who push beyond defined limits.
• Individuals are unwilling to invest time in building discipline and patience.

In practice, I’ve noticed that traders who treat prop firm rules as a professional framework succeed more often than those who view them as obstacles. Understanding your own psychology is just as important as understanding the firm’s contract.

7. How to choose a reliable prop firm

With dozens of prop firms in the market, selecting the right one is critical. A poor choice can waste both time and money, while a reliable firm can accelerate your trading career.

When evaluating a firm, use the following checklist to guide your decision:

• Products offered: Ensure the firm supports your preferred markets, whether forex, indices, stocks, or futures.
• Trading platform: Check if they provide robust platforms such as MetaTrader 4 (MT4), MetaTrader 5 (MT5), or TradingView integrations.
• Fee structure: Compare evaluation, reset, and platform fees carefully to avoid hidden costs.
• Payout conditions: Look for high profit splits (70–90%) with fast and transparent withdrawal processes.
• Contract clarity: Read the terms to confirm that rules on drawdowns, news trading, and scaling plans are clear and fair.

A practical step is to read verified trader reviews on independent sites like Trustpilot or read detailed reviews about prop firms at h2tfunding.com. I personally cross-check fee structures and payout histories before recommending any firm. This diligence helps filter out unreliable providers.

As the FCA (Financial Conduct Authority, 2023) warns, always review contracts thoroughly since unregulated financial products may expose traders to risks they did not anticipate.

8. A day in the life of a funded trader

Trading with a funded account looks different from trading your own money. The daily routine often reflects both opportunity and responsibility.

A typical day for a funded trader might look like this:

1. Morning preparation: Review the economic calendar, check overnight market moves, and confirm whether news restrictions apply.
2. Trading session: Execute trades based on strategy while carefully monitoring risk rules such as daily drawdown.
3. Midday check: Journal trades, evaluate performance, and adjust risk sizing if needed.
4. End of day: Close positions if required by the firm’s rules, log results, and plan for the next session.

In my own case, the biggest difference when I traded with firm capital was the heightened focus on rule compliance. I once avoided a major account breach by stopping early after hitting a small daily loss, a decision I might have ignored in a personal account. That discipline kept me funded and eligible for payouts.

As Market Wizards author Jack Schwager (2012) observed, successful traders “treat each day as a fresh opportunity but never forget the risk boundaries.” Funded traders live by this mindset, balancing profit goals with strict capital protection.

9. About H2T Funding - Choose the Best Prop Firm to Get Funded

H2T Funding was established in 2025 with the mission to support traders by offering clear, reliable, and unbiased insights into proprietary trading firms. In a market often filled with complex contracts and marketing hype, the platform stands out as a trusted source for traders across more than 150 countries.

What sets H2T Funding apart is its commitment to fairness and transparency. The platform focuses on four key areas:

     •  Prop Firm Reviews: Honest assessments of leading proprietary trading firms, built on actual rules and verified trader feedback.

     •  Prop Firm Rules: Detailed explanations of profit splits, drawdown policies, and evaluation conditions, making complex terms easier to understand.

     •  Trading Strategies: Actionable guidance on money management, challenge preparation, and long-term account growth.

     •  Resource: An expanding library of tools, guides, and updates that keep traders informed about market trends and new funding opportunities.

The strength of H2T Funding comes from its professional team, each bringing specialized expertise to the platform:

H2T Funding - Professional team

• Mr. Do Duc Hoang – Co-Founder & CEO with more than 15 years of Forex trading experience at global banks, leading overall strategy.
• Ethan Stroud – Content Director and veteran in financial publishing with a decade at Click Media (WPP Group).
• Tea H2T – Head of Content, analyst skilled in market research and trading strategy.
• Ngan Pham H2T – Content Creator with a background in economics and marketing, making financial topics more accessible.
• Minh Chau – Content Writer dedicated to delivering concise and practical financial research.

By combining expertise, transparency, and trader-focused resources, H2T Funding has become a strategic partner for both newcomers and professionals seeking to succeed in proprietary trading.

10. FAQs

Before joining a prop firm, many traders share similar questions. Here are answers to the most common ones.

10.1. Are prop firms legitimate and regulated?

Prop firms are legal businesses, but most are not regulated like brokers. They operate under contractual agreements rather than financial licenses. Always read terms carefully and choose firms with strong reputations and transparent payout histories.

10.2. What’s the difference between daily drawdown and max drawdown?

Daily drawdown: The maximum you can lose in a single trading day.

Max drawdown: The maximum overall loss allowed on the account from the starting balance or peak equity.

Daily drawdown resets each day, while max drawdown covers the lifetime of the account.

10.3. Do beginners stand a chance of getting funded?

Yes, but only if they first build a track record on demo or small personal accounts. Beginners who rush into evaluations without practice often fail quickly. Preparation and discipline are key.

10.4. How do profit splits typically work?

Most firms offer traders between 70% and 90% of the profits. The remaining share goes to the firm as compensation for providing capital and infrastructure.

10.5. Are evaluations live or simulated, and do payouts still count?

Evaluations are often simulated accounts connected to live market data. Once funded, you typically trade a live or hybrid account, and payouts are real. What matters most is that firms honor withdrawal requests on time.

11. Conclusion

Understanding what is a prop firm is the first step toward deciding if this trading model matches your goals and mindset. Prop firms give traders access to larger capital and a professional structure, but success requires discipline, patience, and respect for the rules.

From my own trading journey, I remember the pressure of my first funded account. I nearly failed by overtrading after a small loss, but stepping back and following the drawdown rules kept me funded. That experience proved that mindset can be just as valuable as strategy.

Ready to take the next step? Visit H2T Funding to explore expert reviews, tools, and resources designed to help you choose the right funding firm and succeed in your challenge.

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