Red Flags and How to Avoid Bad Prop Firms
Traders will often orbit around firms that offer a profit split as high as 90 or even 100%. But an unsustainable financial offer is a red flag, and a sign of a weak business model. If a firm’s profit model relies solely on failed evaluation fees rather than real trading performance, it is a high-risk partner.
Another major red flag is the sudden introduction of any kind of “consistency rule” or other hidden terms when you request a payout. Although some consistency rules are fair for risk management, they must be transparent from day one.
Avoid firms with anonymous leadership or no physical office. Legitimate proprietary trading involves a significant amount of capital, and transparency is a trust indicator.
Beware of firms that use platforms like MetaTrader 5 or NinjaTrader, but display artificial spread spikes not matching live markets. They may be manipulating the environment to trigger your daily loss limits. In practice, they profit when their traders lose money.
Before Choosing a Prop Firm: How to Check Whether the Firm is Trustworthy
Are prop firms legit? It depends on their level of transparency.
Before joining a prop firm, verify their corporate status. Check if they’re registered in reputable financial hubs. Look for firms that offer public payout proof and have partnered up with experienced traders you know and trust.
Check their technical infrastructure. A professional trading environment should have minimal slippage and fast execution.
Another important factor is the educational resources provided. A firm that emphasizes trader development is more likely to want you to succeed. A wealth of educational content that actually helps traders grow are much more valuable than just superficial challenges that can be sold.
How Traders Make Money While Prop Trading? Calculating the Cost of Participation
If you have been interested in how to become a funded trader, you’re probably already familiar with the evaluation fee.
The evaluation fee, however, is just the start. There are also activation fees, monthly data costs, and reset fees.
For futures prop trading, you’ll likely pay for a data feed from the CME, which can be pretty expensive. We’re talking about 80-150 USD per month.
To find the true cost of prop trading, you must calculate your breakeven point based on the profit split. Use this formula:
Breakeven = Total Fees ÷ Trader Split %
If you spend $500 on passing a prop challenge and have an 80/20 split, you’d need to earn $625 in profit to cover your initial investment. Some firms also require a payout buffer, where you can only withdraw money when the account reaches a certain threshold above the starting point.
