Proprietary Trading: How Prop Firms Work, Top Strategies, and How to Get Funded (2025 Guide)

Navigate proprietary trading essentials with this beginner’s guide, offering key insights to kickstart your journey.

What Is Proprietary Trading?

Proprietary trading, often shortened to prop trading, is a financial practice where trading firms, hedge funds, or investment banks use their own capital to trade financial markets for direct profit. Unlike retail traders or asset managers who trade on behalf of clients, prop firms exclusively trade for themselves, with traders using the firm’s funds instead of their own.

In a prop trading firm, professional traders execute positions across diverse financial markets, such as stocks, forex, commodities, options, futures, and cryptocurrencies. These firms aim to generate profits by leveraging capital, advanced trading technology, and specialized strategies. A key advantage for traders is that they typically keep a significant share of the profits they earn while assuming little to no personal financial risk.

The Volcker Rule, a component of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act, restricts banks with U.S. operations from engaging in proprietary trading. However, independent prop firms or firms outside of these restrictions thrive globally, providing capital access and growth opportunities for traders.

How Proprietary Trading Firms Operate

Understanding the operational framework of a proprietary trading firm is essential for anyone looking to break into this high-reward trading environment. Prop firms build their business models around skilled traders, robust technology, and rigorous risk management systems. Here’s a breakdown of how these firms typically function:

Capital Allocation

Prop firms allocate capital accounts to traders based on their performance, experience, and risk management abilities. New traders might start with smaller accounts, with the opportunity to scale up to larger capital allocations as they meet performance milestones.

Trader Recruitment and Training

Many firms actively scout for talented, disciplined traders through evaluation programs, challenges, and training academies. These programs test a trader’s profitability, risk control, and market strategy consistency — typically in demo or simulated environments — before granting access to live funds.

Risk Management Framework

Prop firms implement strict risk management protocols to protect their capital. This includes:

• Maximum daily loss limits
  
• Position size restrictions
  
• Stop-out rules
  
• Risk-to-reward ratio targets By enforcing these rules, firms can manage trader risk exposure while giving traders freedom within predefined limits.
  

Strategy Implementation and Diversification

Prop traders employ a variety of strategies, ranging from high-frequency trading (HFT) and market making to trend following, arbitrage, and options strategies. Firms may specialize in one or more strategy types, allowing traders to focus on what they do best while leveraging firm capital and infrastructure.

Advanced Technology and Infrastructure

Technology is a vital part of a prop firm’s edge. These firms invest in:

• Low-latency execution platforms
  
• Algorithmic trading systems
  
• Real-time data feeds
  
• Advanced analytics tools This infrastructure ensures traders can execute efficiently, access deep market liquidity, and analyze price movements with precision.
  

Continuous Performance Assessment

Traders’ results are closely monitored in real-time, with firms conducting regular performance reviews to evaluate:

• Profitability
  
• Consistency
  
• Risk discipline
  
• Strategy effectiveness Successful traders may receive capital increases or more favorable profit-sharing terms.
  

Revenue and Profit-Sharing Model

Prop firms generate revenue through profit splits with traders. A typical model allows traders to keep 70% to 90% of profits they generate, while the firm retains the rest. Some firms may also earn through monthly platform fees, education services, or evaluation programs.

Key entities introduced: Capital allocation, Evaluation programs, Risk management, Profit-sharing, HFT, Market making, Algorithmic trading, Prop trader performance, Trading infrastructure.

Top Proprietary Trading Strategies (2025)

Proprietary trading firms rely on a diverse range of trading strategies to capitalize on market inefficiencies and profit opportunities. These strategies are often tailored to specific market conditions, timeframes, and financial instruments. Here are the most widely used and profitable prop trading strategies in 2025.

Market Making

Market making involves placing both buy and sell orders in a financial instrument to profit from the bid-ask spread. Prop traders acting as market makers continuously quote prices and provide liquidity to markets. The goal is to capture small, consistent profits while maintaining neutral market exposure. This strategy is commonly applied in equities, futures, forex, and options markets.

High-Frequency Trading (HFT)

HFT is a form of algorithmic trading that uses complex algorithms and ultra-low latency systems to execute a large number of orders in fractions of a second. Proprietary firms invest heavily in infrastructure to support this strategy, which seeks to capitalize on minute price discrepancies and rapid market movements. HFT is typically used in stocks, futures, and forex markets.

Statistical Arbitrage

This quantitative trading strategy involves identifying price inefficiencies or correlations between assets using statistical models. Traders open positions in pairs or baskets of related assets, betting on their relative price movements converging or diverging. Prop firms use automated systems and data analysis tools to run these models at scale.

Trend Following

Trend following strategies aim to capture sustained price movements by entering positions in the direction of the prevailing market trend. Traders typically use technical indicators like moving averages, momentum oscillators, and breakout levels to identify and ride trends in markets such as forex, equities, and commodities.

Arbitrage Trading

Arbitrage strategies exploit price differences between related instruments or markets. Common types include:

• Inter-market arbitrage: Trading the same asset across different exchanges.
  
• Cross-asset arbitrage: Trading correlated assets like spot and futures.
  
• Options arbitrage: Exploiting pricing inefficiencies between options and underlying assets.
  

Options and Derivatives Trading

Options and derivatives trading involves using financial instruments whose value is derived from underlying assets. Prop traders may engage in:

• Options spreads
  
• Volatility trading
  
• Futures arbitrage
  
• Hedging strategies These approaches allow traders to profit in rising, falling, or sideways markets, using options pricing models and market volatility forecasts.
  

Swing and Day Trading

Many proprietary traders focus on short-term trading strategies, including swing and day trading. These strategies involve:

• Holding positions from minutes to days.
  
• Capitalizing on technical setups, news-driven volatility, and market sentiment shifts.
  
• Managing strict risk controls and daily profit targets.
  

By combining these strategies, prop firms diversify risk and enhance their ability to generate consistent profits across different market conditions.

Types of Markets and Instruments Prop Firms Trade

Proprietary trading firms operate across a wide spectrum of financial markets, offering traders access to capital and advanced tools to trade a diverse set of instruments. Understanding these markets is crucial for aspiring prop traders.

Equities (Stocks)

Equities remain a core focus for many prop firms. Traders profit from price fluctuations in publicly listed companies, using techniques such as day trading, swing trading, scalping, and HFT.

Fixed Income Securities

This category includes government bonds, corporate bonds, and municipal bonds. Prop traders in fixed income markets typically look for opportunities based on interest rate changes, credit spreads, and macroeconomic data.

Derivatives

Prop traders actively use derivatives like options, futures, and swaps to hedge positions, speculate on future price movements, or arbitrage pricing inefficiencies. These instruments offer leverage and flexible trading opportunities in volatile markets.

Forex (Foreign Exchange)

The forex market is one of the largest and most liquid markets globally. Prop firms participate by trading currency pairs, profiting from exchange rate fluctuations driven by geopolitical events, economic data, and central bank policies.

Commodities

Prop traders in commodities focus on energy (oil, gas), precious metals (gold, silver), and agricultural products (corn, wheat, coffee). Price movements in commodities are influenced by supply-demand dynamics, weather patterns, and global trade policies.

Exchange-Traded Funds (ETFs) and Mutual Funds

These funds offer exposure to broad market indices, sectors, or asset classes. Prop traders use ETFs and mutual funds for market hedging, sector rotation strategies, and arbitrage opportunities.

Cryptocurrencies

Many prop firms have expanded into digital assets like Bitcoin, Ethereum, and other altcoins. Crypto markets present high volatility and 24/7 trading, offering unique opportunities for short-term trades, arbitrage, and HFT strategies.

Indices

Trading market indices, such as the S&P 500, NASDAQ, and Dow Jones, allows traders to speculate on the performance of a broad market or sector without trading individual stocks. Prop firms often use indices for macro trades, hedging, and index arbitrage.

How to Get Funded by a Prop Firm

Getting funded by a proprietary trading firm is one of the most accessible ways for skilled traders to gain access to larger trading capital, industry-grade tools, and performance-based profit sharing. While each firm has its own requirements, the overall process generally follows a structured pathway designed to identify disciplined, profitable traders.

Research and Selection

Start by identifying reputable prop trading firms that align with your trading style, preferred markets, and career goals. Key factors to consider include:

• Profit split percentage
  
• Funding account sizes
  
• Allowed instruments
  
• Trading platforms offered
  
• Risk management rules
  
• Withdrawal policies Look for firms with transparent conditions, positive trader reviews, and clear operational frameworks.
  

Application and Evaluation

Once you’ve selected a firm, complete their application process. This typically involves:

• Submitting your trading history, statistics, and track record
  
• Completing an evaluation challenge using a demo or simulated account
  

During the evaluation, you’ll need to:

• Achieve a specified profit target (usually 8%–12%)
  
• Adhere to strict risk management rules, such as daily loss limits and maximum drawdowns
  
• Maintain consistent trading discipline
  

The evaluation period is designed to simulate live market conditions while testing your ability to trade profitably within controlled risk parameters.

Funding Process and Account Scaling

After successfully passing the evaluation, traders receive a live funded account with a predefined capital allocation.
Typical starting capital ranges from $10,000 to $200,000 or more, depending on the firm and trader performance.

As traders demonstrate:

• Consistent profitability
  
• Strong risk control
  
• Stable trading psychology
  

They may qualify for account scaling, where prop firms increase the trader’s capital allocation based on performance milestones.

Profit Split Models

Prop trading firms use profit-sharing arrangements instead of fixed salaries.
Here’s a typical breakdown:

Risks in Prop Trading and How to Manage Them

While proprietary trading offers lucrative opportunities, it also involves significant risks. Understanding these risks — and managing them effectively — is crucial for long-term success in a prop firm environment. Prop trading differs from retail trading not just in scale, but in the exposure levels and accountability structure.

Key Risks in Proprietary Trading

Leverage Risk

Prop firms often offer high leverage, amplifying both potential profits and losses. While leverage can magnify returns, it also increases the risk of substantial financial setbacks. Exceeding risk limits can quickly deplete capital or violate trading rules.

Market Risk

Prop traders are directly exposed to price volatility, geopolitical events, economic announcements, and liquidity fluctuations. Rapid, unexpected market moves can lead to large losses, especially in leveraged positions.

Firm Stability Risk

The financial health and operational management of the prop firm itself can impact a trader’s position. Issues such as firm insolvency, sudden policy changes, or liquidity constraints can negatively affect funded traders.

Regulatory Risk

Proprietary trading is subject to varying financial regulations and restrictions in different countries. Regulatory changes, such as margin rule adjustments or market access restrictions, can impact trading strategies and firm operations.

Strategy Risk

Trading strategies that work well in one market environment may underperform or fail in another. Market conditions, volatility regimes, or asset correlations can change quickly, rendering some strategies ineffective.

Effective Risk Management Practices

Strict Risk Limits

Prop firms enforce:

• Daily loss limits
  
• Maximum drawdown caps
  
• Position size limits These controls help manage individual and firm-wide risk exposure.
  

Stop-Loss Orders and Risk-to-Reward Ratios

Successful prop traders use stop-loss orders on every position and target favorable risk-to-reward ratios, typically aiming for at least 2:1 or 3:1.

Diversified Trading Approaches

Avoid overconcentration in a single market, strategy, or asset class. Traders who diversify their trading across multiple instruments or timeframes reduce exposure to isolated market shocks.

Continuous Strategy Evaluation

Successful prop traders continuously evaluate and refine their strategies based on market conditions, performance data, and volatility trends. Risk models and assumptions should be updated regularly.

Psychological Risk Management

Emotional discipline is as important as technical skill. Avoiding impulsive trades, managing losses calmly, and adhering strictly to trading plans are critical behaviors in a high-pressure prop firm environment.

Due Diligence on Prop Firms

Before committing to a firm:

• Research its history, funding capacity, and payout reliability
  
• Review profit split terms, risk policies, and withdrawal rules
  
• Confirm regulatory compliance where applicable
  

Ongoing Education

Stay updated on market trends, new strategies, risk management techniques, and regulatory changes. Successful prop traders treat education and adaptability as non-negotiable components of their trading careers.

Key Advantages of Joining a Prop Firm

Joining a proprietary trading firm offers traders several advantages compared to trading independently with personal capital. These benefits range from access to larger funding pools to professional-grade technology, education, and structured risk management systems.

Access to Enhanced Capital

The primary advantage of prop trading is the ability to trade with substantially larger capital allocations than most individual traders can access. This allows skilled traders to scale up their positions, amplify profits, and fully apply sophisticated trading strategies without risking personal funds.

Profit-Sharing Opportunities

Prop firms typically operate on a profit-sharing model rather than a fixed salary system. This means that traders receive a significant percentage of the profits they generate, often ranging from 70% to 90%. This performance-based compensation structure incentivizes disciplined, high-quality trading and creates direct financial rewards for strong results.

Access to Professional Trading Tools and Technology

Prop trading firms invest heavily in state-of-the-art trading platforms, market data feeds, algorithmic systems, and real-time analytics. Traders gain access to infrastructure that provides faster order execution, better charting tools, and deeper market insight — advantages that are often unavailable to retail traders.

Professional Training and Mentorship

Most top-tier prop firms offer structured training programs, trading bootcamps, mentorship sessions, and performance reviews. New and experienced traders alike benefit from learning opportunities, exposure to institutional-grade trading methodologies, and personalized coaching from seasoned professionals.

Institutional-Grade Risk Management

Effective risk control is a cornerstone of proprietary trading. Firms implement:

• Position size limits
  
• Daily loss thresholds
  
• Drawdown caps
  
• Stop-loss enforcement systems These measures protect both the trader and the firm, ensuring that individual mistakes don’t lead to catastrophic capital losses.
  

Collaborative Trading Environment

Prop firms foster a dynamic and collaborative trading culture, where traders share market ideas, strategy insights, and technical setups. This environment benefits both novice and experienced traders by accelerating learning curves and improving market awareness through peer interaction.

Regulatory, Legal, and Administrative Support

Prop firms handle regulatory compliance, accounting, legal issues, and operational management, allowing traders to focus exclusively on market analysis and trade execution. This minimizes the administrative burden on traders, providing a seamless and efficient trading experience.

Top Proprietary Trading Firms in 2025

The proprietary trading industry has grown significantly in recent years, with firms specializing in various asset classes, strategies, and trading styles. Whether you’re looking to trade forex, equities, futures, or cryptocurrencies, selecting the right firm is a key step in a trader’s career progression. Here’s a look at some of the most respected and competitive prop trading firms in 2025.

FTMO

FTMO is one of the most recognized names in the forex prop trading space. Known for its structured evaluation challenges and generous profit-sharing model (up to 90%), FTMO offers traders access to significant capital with strict but fair risk management rules. They focus on forex, indices, commodities, and crypto markets.

The5ers

The5ers specializes in funding forex and indices traders globally. Traders undergo an evaluation process with achievable profit targets and conservative risk limits. The5ers stands out for its account scaling program, allowing successful traders to progressively manage larger amounts of capital.

Topstep

Topstep focuses primarily on futures trading, offering funded accounts after traders pass a two-step evaluation program. Known for its strict risk management requirements and trader education resources, Topstep remains a popular choice for futures traders looking to enter proprietary trading.

MyFundedFX

MyFundedFX is a newer but rapidly growing firm in the forex and indices markets. It offers flexible funding options, including instant funding programs alongside traditional evaluation-based accounts. Their scaling and reward structure make them a competitive option for profitable traders.

Lux Trading Firm

Lux Trading Firm offers funding for traders specializing in forex, commodities, indices, and stocks. It distinguishes itself with low maximum drawdown rules, a professional trading environment, and a long-term scaling plan for high-performing traders.

Earn2Trade

Focusing on futures and forex, Earn2Trade provides an evaluation program (The Gauntlet Mini) where traders prove their profitability and risk management skills. Their funded trader program gives access to real-money accounts on established trading platforms with solid risk control structures.

These firms vary in their:

• Market focus (Forex, Futures, Equities, Crypto)
  
• Profit split percentages
  
• Evaluation challenges
  
• Risk management rules
  
• Account scaling opportunities
  

Aspiring traders should research these firms carefully to find one that matches their trading style, financial goals, and preferred markets.

How Prop Trading Compares to Other Types of Trading

Proprietary trading differs significantly from other trading models in terms of capital structure, risk exposure, profit incentives, and regulatory oversight. Understanding these distinctions is crucial for traders deciding between working with a prop firm, managing their own accounts, or working within an institutional framework.

Proprietary Trading vs. Retail Trading

Prop Trading vs. Asset Management

Prop Trading vs. Hedge Funds

Prop Trading vs. Institutional Trading (Banks)

Proprietary trading stands apart as a performance-driven, profit-sharing, high-risk model where skilled traders access substantial capital without risking personal funds. The structure, profit incentives, leverage, and trading frequency typically make prop trading far more aggressive and dynamic than traditional retail or institutional trading.