What Is a Prop Firm? How Funded Accounts Work
A proprietary trading firm (prop firm) lets traders trade the firm's capital after passing an evaluation. A funded account is the stage after the challenge, when profits are shared under the firm's risk rules.
Written by the calc.forex Editorial Team. Last reviewed . · 6 min read · How we check our numbers
Key takeaways
- A prop firm provides trading capital after you pass its evaluation (often called a challenge). You trade under its risk rules and keep a share of profits.
- A funded account is the live (or simulated live) stage after the challenge. Rules still apply: daily loss, maximum drawdown and often a consistency rule.
- Drawdown may be static (fixed floor) or trailing (follows a high-water mark). Know which one your firm uses before you size a trade.
- Size every trade from the room left to the nearest limit, not from the starting balance. The prop-firm drawdown calculator turns the rules into that room.
- This guide explains the model. It is not a review of any firm, and challenge fees, profit splits and rule details change — always read the current rulebook.
On this page
What is a prop firm?
A proprietary trading firm, or prop firm, is a company that allocates capital for traders to trade under its name and risk framework. In the retail "funded trader" model that most people mean online, you usually pay for an evaluation, trade a simulated account to targets, and — if you pass — receive a funded account where profits are split between you and the firm.
That is different from a traditional desk prop firm that hires employees, pays a salary or draw, and puts its own balance sheet at risk on exchange floors. Both share the idea that the firm owns the capital; the online challenge model is the one this guide covers, because that is what "what is a prop firm" and "how do prop firms work" usually ask about in search.
Prop firms are not brokers in the retail sense. Your counterparty relationship, payout process and tax treatment depend on the firm's terms and your jurisdiction. Treat marketing claims about pass rates or average payouts with caution unless you can verify them independently.
What is a funded account?
A funded account is the stage after you have met the evaluation criteria. You trade with a larger notional balance (for example a $50,000 or $100,000 account size) under the firm's risk limits, and you are paid a share of closed profits according to the profit split in the contract.
Important nuances:
- Many "funded" stages are still simulated or tightly risk-managed; the firm's live hedging or A-book arrangements are internal. What matters for you is the rulebook: when a breach ends the account, and when a payout is owed.
- Account size is a risk parameter, not cash sitting in your bank. A $100,000 funded account does not mean you can withdraw $100,000.
- Daily loss and maximum loss limits usually stay in force after funding. Passing the challenge does not remove the drawdown rules.
Use the prop firm drawdown calculator with your current balance, equity and firm limits to see how much room you have left today and overall.
How do prop firms work?
The typical online path looks like this:
- Choose an account size and ruleset. Larger sizes cost more to evaluate and usually allow more contracts or lots, with proportionally larger dollar drawdowns.
- Pay an evaluation fee (one-time or with free retries, depending on the offer). Fees and refund policies vary; this guide does not quote current prices because they change.
- Trade the challenge to a profit target without hitting the daily or maximum loss. Some firms use one phase; others use two.
- Verification or funded stage — another period of trading under similar or slightly different rules, then payout eligibility after a minimum number of trading days or a payout cycle.
- Ongoing compliance — consistency rules (no single day making too large a share of total profit), news restrictions, weekend holding rules and instrument lists are common.
Revenue for the firm typically comes from evaluation fees and from traders who fail, plus a share of profits from those who succeed. That incentive structure is why risk rules are strict: the product only works if large losses are cut off early.
Static vs trailing drawdown on prop accounts
Two loss limits appear on almost every retail prop account:
- Daily loss limit — how much equity can fall in one trading day from the start-of-day balance or equity.
- Maximum loss / max drawdown — the floor for the account as a whole.
The maximum loss is either:
| Type | How the floor moves | What it means in practice |
|---|---|---|
| Static | Fixed from the starting balance (e.g. start $100,000, floor $90,000) | Profit does not raise the floor; you always have the same dollar cushion from the start. |
| Trailing (balance or EOD) | Follows the highest closed balance, often only at day end | Open profit you never bank may not move the floor. |
| Trailing (intraday / equity) | Follows the highest equity, including open profit | A spike that reverses can permanently tighten the floor. |
Many trailing rules stop trailing once the floor reaches the starting balance (sometimes plus a small buffer). From then on the account behaves like a static floor. The drawdown guide explains recovery maths; the prop calculator applies your firm's shape to live numbers.
Sizing trades inside prop rules
On a personal account you often risk a fixed percentage of equity. On a prop account the binding constraint is usually the dollar room to the nearer of the daily and maximum limits.
Then convert that dollar risk into lots or contracts with your stop distance:
Example shape (illustrative only): if you have $1,000 of daily room left and a 20-pip EUR/USD stop at $10 per pip per lot, the largest size that stays inside that room is $1,000 ÷ (20 × $10) = 5.00 lots — before costs and before leaving a buffer. Most traders use a fraction of the room so one stop does not sit on the breach level.
For exchange futures evaluations, size from tick value with the futures position size calculator. For forex and CFD challenges, use the FX position size calculator.
Consistency rules
A consistency rule caps how large any single day's profit can be as a share of total profit (for example, no day more than 30–40% of the total). The aim is to discourage one oversized gamble that technically hits the profit target.
If your best day is already a large share of profits, later days must add enough smaller gains to dilute that share before a payout. The consistency rule calculator shows how much more profit you need at a given best-day share.
What this guide does not cover
- Firm rankings or reviews. Rules, fees and payout reliability differ and change; compare primary documents, not screenshots on social media.
- Guaranteed pass rates or income. Any specific statistic quoted without a dated source should be treated as marketing.
- Legal or tax advice. How payouts are classified in your country is outside the scope of a calculator site.
Use the calculators to understand the arithmetic of the rules you already agreed to.
Frequently asked questions
What is a prop firm?
A proprietary trading firm allocates capital for traders to use under its risk rules. In the retail funded-trader model you usually pass a paid evaluation, then trade a funded account and share profits with the firm.
What is a funded account?
A funded account is the stage after the challenge: you trade an account sized by the firm (for example $50,000 or $100,000 notional) under daily and maximum loss limits, and you receive a share of closed profits if you stay inside the rules.
How do prop firms work?
You buy an evaluation, trade to a profit target without breaching drawdown limits, then move to a funded stage with ongoing risk rules and a profit split. The firm earns from evaluation fees and from its share of profitable accounts.
What is the difference between static and trailing drawdown?
A static maximum loss is a fixed floor from the starting balance. A trailing maximum loss follows a high-water mark (balance or equity), so the floor rises as you make money and never moves back down.
How should I size trades on a prop account?
Size from the dollar room left to the nearer of the daily and maximum limits, then convert that risk into lots or contracts with your stop distance. Leave a buffer for costs and slippage; do not use the entire room on one trade.
