There has been a recent upsurge of CFD prop firms appearing. These prop firms offer traders the opportunity to trade with their capital and earn a percentage of the profits. But are these prop firms better than trading with a broker? And what are the risks and benefits of joining them? In this publication, we will explore these questions and more.
🔹What are CFD Prop Firms?
CFD prop firms are different from traditional prop firms in several ways. Traditional prop firms typically employ traders and give them access to proprietary trading tools and tactics as well as training and coaching. Contrarily, CFD prop businesses fund traders once they successfully complete a task or audition rather than hiring them. Typically, the audition entails paying a fee and achieving specific trading goals within a predetermined time span. A profit target, a maximum drawdown limit, a daily loss limit, and other risk management guidelines could be part of the trading objectives.
If a trader passes the audition, they will receive a funded account with a certain amount of capital, ranging from $10,000 to $1 million or more depending on the prop firm. The trader can then trade with the prop firm's capital and keep a percentage of the profits, usually between 50% to 80%. The prop firm will also monitor the trader's performance and enforce the same trading objectives as in the audition. If the trader violates any of the rules or loses too much money, they may lose their funded account or have to start over.
🔹Benefits of Joining a CFD Prop Firm
Joining a CFD prop firm gives traders access to more capital than they would otherwise not have, which is one of the key advantages. As a result, they may be able to trade more instruments, diversify their portfolio, and boost their earning potential. Another advantage is that the trader's downside risk is diminished because they are just putting their audition fee at danger and nothing more, not their own money. Additionally, certain prop companies provide extra advantages like coaching, education, community support, scaling plans, and bonuses.
🔹Drawbacks and Challenges of Joining a CFD Prop Firm
However, joining a CFD prop firm also has some drawbacks and challenges. One of them is that it can be difficult to pass the audition and maintain the funded account, as some of the trading objectives can be very strict and unrealistic. For example, some prop firms require traders to make a 10% profit within 30 days while keeping their drawdown below 5%. This can put a lot of pressure on traders and force them to overtrade or take excessive risks. Some prop companies may not be transparent or reliable and may not actually supply real money to trade with, which is another disadvantage. Instead, they might run a Ponzi scheme or use the audition fees to distribute the earnings. Therefore, before joining any prop firm, traders should exercise due diligence and investigation. The repute of the prop firm, regulation, fees, profit splits, trading products, leverage, platform, customer support, and withdrawal procedures are a few of the variables to take into account. Finally, another challenge is that having more capital does not necessarily mean being a better trader. Trading with more money can also increase the psychological pressure and emotional stress that traders face. Therefore, traders need to have a solid trading plan, strategy, discipline, and risk management skills before joining a prop firm. They also need to be realistic about their expectations and goals, and not rely on prop firms as a shortcut to success.
🔹Conclusion
In conclusion, CFD prop firms can be a viable option for traders who want to trade with more capital and earn more profits while limiting their downside risk. However, they also come with some challenges and risks that traders need to be aware of and overcome. Therefore, traders need to weigh the pros and cons of joining a prop firm versus trading with a broker based on their own circumstances and preferences. Trading with a CFD prop firm can be a great opportunity for traders who have a proven track record of profitability and want to leverage their skills to make more money. One of the main issues is that the CFD prop industry is heavily unregulated and lacks transparency and accountability. This means that traders may not have legal protection or recourse in case of disputes or frauds. Moreover, some prop firms may impose strict rules and conditions on their traders, such as high fees, unrealistic targets, or limited withdrawal options.
Therefore, before signing up with a CFD prop firm, traders should always conduct their due diligence and research. They should search for reputable and reliable prop companies that have a good track record, transparent terms and conditions, and equitable profit-sharing plans. Additionally, they should contrast various prop businesses and pick the one that best matches their trading preferences, objectives, and style. Additionally, traders should keep in mind that the best option to guarantee complete control and security over their trading activity remains opening their own trading account with a reputable broker.
Interesting. I have always wondered why though if someone was good at trading why wouldn't they use their own money and compound it. Doesn't matter what you start off with. Compounding overtakes salaries and commission structures pretty quickly if you are any good and consistent. Thanks for posting though. Was a discussion I hadn't seen before on here and yet another way to trade the markets.
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ChristopherDownie
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Thank you , I totally agree with you. Compounding your own account can definitely lead to higher returns in the long run. But I also see the appeal when thought about in terms of risk to reward. They are investing 500 to gain access to 100,000. But as we know a lot of the persons signing up dont have a robust and tested system so they end up losing their accounts and just paying for countless signups.
Bitcoin-N-Bikinis
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Echoing both of your sentiments. Thank you for covering this topic as it’s nice to know I’m not alone in my skepticism of these firms.
ChristopherDownie
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@Bitcoin-N-Bikinis, Yes, A lot of buzz around these firms and its a very unregulated space at the moment. Everyone needs to be very careful with what companies they are working with.
TraderNotAddict
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@zAngus the main issue really is that the markets are evolving too quickly and there are a lot of hidden risks in trading in terms of both market and psychological risk factors. Trading with a prop firm’s money can limit the potential downside and augment any good trader’s earning potential significantly.
DirkOz
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@Cnicholasdownie Interesting point of view. When you stated "people signing up lose their accounts, then sign up again, countless times" Would you have any evidence of this, or explain further? 🙏 PS I'm an interested bystander.
ChristopherDownie
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@DirkOz, Indeed, within the industry, there are several firms that openly disclose their pass rates. It is prudent to refrain from explicitly mentioning specific firm names, as the intention is not to attack any specific entity. Similar to brokers who release statistics indicating that 80% of traders lose their accounts, proprietary trading firms also provide such data. Notably, a recent claim by one such firm indicated that approximately 5% of individuals who undertake the trading challenge successfully pass, and of those, only around 2% ultimately reach the milestone of receiving a second payout. These statistics shed light on the rigorous nature of these challenges and the demanding requirements faced by aspiring traders.
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