What is a Prop Firm?
What is a Prop Trading Firm? A Clear Guide to Its Structure, Features, Benefits, and Cautions
Prop trading firms—short for proprietary trading firms—have been gaining increasing attention as a new model of trading. In particular, the "evaluation-based prop firm" model allows traders to take on the markets in a professional environment without risking their own capital.
This article provides a clear and structured overview of how prop trading firms work, their key features, and the pros and cons of the model—with a special focus on how this model is emerging in Japan.
Table of Contents
- What is a Prop Trading Firm?
- Key Features of Evaluation-Based Prop Firms
- How the Evaluation-Based Model Works
- Profit Sharing Structure
- Benefits and Challenges of Evaluation-Based Prop Firms
- Conclusion
1. What is a Prop Trading Firm?
A proprietary trading firm is a company that trades the financial markets using its own capital. Traders are provided with funds by the firm to trade, and in return, they receive a portion of the profits made—without using their personal funds.
While profit generation is the primary goal, many prop firms also focus on trader development and skill enhancement. As this model expands globally, the “evaluation-based prop firm” is emerging as a particularly notable development in Japan.
2. Key Features of Evaluation-Based Prop Firms
・Capital Allocation
Traders are provided with simulated trading capital (via demo accounts) and take on no financial risk of their own. Losses do not translate into real monetary losses, making it a fully capital-supported model.
・Education and Support
Many firms offer structured educational content and mentoring systems to help traders grow. From beginners to experienced traders, tailored programs enable practical skill development.
・Strict Risk Management Rules
Risk management lies at the core of every prop firm. Traders must adhere to predefined rules—such as maximum loss limits, position sizes, and lot restrictions—creating a sustainable and replicable trading environment.
・Profit Sharing Model
Profits generated are shared between the firm and the trader based on a pre-defined percentage. Commonly, traders receive 60%–90% of the profits, with high-performing traders earning higher shares.
3. How the Evaluation-Based Model Works
Evaluation-based prop firms are designed to identify and nurture talented traders, and typically follow this process:
・Evaluation Phase
Traders begin by trading with a demo account under strict risk management rules for a set period. Those who demonstrate consistent performance are selected for funded trading.
・Training Programs
Comprehensive training is provided to build key skills in strategy development, market analysis, and mental discipline—core traits of a professional trader.
・Professional Trading Infrastructure
These firms offer real-time market data, advanced charting tools, and backtesting features, providing a high-level environment for traders to showcase their full potential.
・Funded Trading Opportunities
Traders who meet evaluation standards may be given access to simulated capital under realistic market conditions. From here, they can begin earning rewards through a profit-sharing structure.
4. Profit Sharing Structure
One of the most attractive aspects of prop firms is their profit-sharing system. Profits made by traders are split between the trader and the firm based on a predefined percentage.
The exact percentage depends on factors like trading performance, experience level, and the contract terms. Typically, traders receive between 60% and 90%, offering a highly competitive compensation structure.
5. Benefits and Challenges of Evaluation-Based Prop Firms
Key Benefits
・No Personal Capital Risk
Traders don’t need to invest their own money and can gain real-world experience through demo accounts backed by the firm.
・Skill Development and Career Growth
With structured education and a robust evaluation system, traders can grow professionally and refine their practical skills.
・Community and Networking
Many firms provide access to trader communities, encouraging peer learning and collaboration in a competitive environment.
Common Challenges
・Psychological Pressure
Targets and drawdown limits can place emotional strain on traders, especially under performance pressure.
・Limited Freedom
Trading activities must follow firm rules, which may impose constraints on a trader’s personal style or strategy.
・Profit Sharing Model
Since profits are split with the firm, traders don’t retain 100% of their earnings—an important point to understand upfront.
To succeed, traders should carefully evaluate these elements and choose a firm that aligns with their goals and style.
6. Conclusion
Evaluation-based prop firms present a compelling opportunity for aspiring traders to grow in the financial markets. The ability to gain experience without putting personal funds at risk is a significant advantage—particularly for those working toward a professional trading career.
That said, strict risk controls and the mental demands of the environment are real. The key to success lies in understanding your own strengths and weaknesses and using the firm’s structure to your advantage.
Fundora is an exam-based prop firm that fairly evaluates your trading skills and provides a large demo capital environment. With a streamlined evaluation process, you can aim for professional qualification in as little as five days and begin full-scale trading early on. Our bilingual support team is available 24/7/365, so you can get your questions answered and concerns addressed at any time. Why not take the first step toward becoming a pro trader with Fundora?
