Joining a prop trading firm can be risky if you don’t take the time to carefully review the terms and agreements. Many traders overlook important details, leading to unexpected fees, restrictive rules, or account terminations. Here's what you need to know upfront:
- Only 5%-10% of traders pass challenges, and just 20% of those receive payouts. Many lose accounts due to misunderstanding rules.
- Look out for hidden costs like evaluation fees, account maintenance fees, or data feed charges.
- Check for profit splits, payout schedules, and withdrawal limits. Splits range from 50%-90%, and some firms offer 100% on the first $10,000 or $25,000.
- Understand legal jurisdiction and dispute policies, especially with international firms. Foreign arbitration can limit your legal options.
- Review trading rules like daily loss limits, drawdowns, and banned strategies. Restrictions can vary between evaluation and funded accounts.
Take the time to read every clause, including fees, trading restrictions, and termination policies. Even small details can impact your trading experience and profits. This guide breaks down the key points to help you avoid surprises.
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Understanding Basic Prop Firm Agreements
Grasping the details of your prop firm's agreement is essential to avoid unexpected fees, restrictive policies, or unfavorable terms. Carefully reviewing the agreement before signing ensures you understand your rights, responsibilities, and the nature of your relationship with the firm. This step builds on earlier cautionary advice, helping you fully comprehend your contractual obligations.
What Type of Agreement Are You Signing?
First, determine the kind of agreement you're entering. Many prop firms operate as private trading companies or technology providers, meaning you're likely entering a service contract rather than a traditional brokerage relationship. This distinction impacts key areas like taxation on profits and the protections available if disputes arise.
The agreement should clarify whether you're trading with real or simulated funds and when any transitions occur. Look for sections titled "Nature of Services", "Account Type", or "Trading Agreement" to find these details.
Legal Jurisdiction and Governing Law
Every agreement should specify which country's laws apply and where disputes will be resolved. This is especially important for U.S.-based traders working with international firms, as you might be subject to foreign arbitration. Knowing the jurisdiction ensures you understand your legal options and can prepare for any terms that may not work in your favor.
For example, some firms operate separate entities for different regions, which could mean U.S. traders are bound by foreign arbitration clauses that limit access to domestic legal protections. Check if the firm has a U.S.-based entity or specific provisions for American clients, as these factors also influence tax reporting and legal safeguards.
In addition to jurisdiction, agreements typically outline who is eligible to join and how long the trading arrangement lasts.
Who Can Join and How Long Terms Last
Most firms set age restrictions (usually 18 or older) and may exclude traders from certain countries due to regulatory requirements. Beyond eligibility, the agreement should detail how long your account stays active and the conditions under which it could be terminated.
Here’s how a few firms handle inactivity:
- FundingPips: Requires at least one trade within 30 consecutive days to keep your account active; otherwise, it will be terminated.
- Alpha Capital: Deactivates accounts after 30 days of inactivity, with no option for reactivation.
- E8 Markets: Allows 60 days of inactivity before disabling an account, but no refunds are provided.
- FTMO: Enforces a 30-day inactivity rule but offers the option to freeze your account for a period ranging from 7 days to 6 months.
The agreement should also outline the firm’s rights to modify terms, suspend accounts, or terminate the relationship. Some firms reserve the right to make rule changes with little notice, which could suddenly render your trading strategy non-compliant. Pay close attention to clauses like "Amendments", "Modifications", or "Term and Termination" to understand how much control the firm retains over your account.
Fees, Payouts, and Profit Splits Explained
Prop Firm Fee Structures and Profit Split Comparison Chart
After understanding the contractual basics, it’s time to dive into the financial terms that directly impact your trading earnings. Factors like upfront costs, profit-sharing percentages, and withdrawal rules all play a role in determining how much you take home. Let’s break down how fees, profit splits, and payout schedules work together to shape your net income.
Registration Fees and Monthly Charges
Most proprietary trading firms require an evaluation fee to participate in their trading challenges, which can range from $50 to over $1,000, depending on the account size you’re aiming for. For example, if you’re going for a $100,000 account, the fee typically falls between $135 and $499 as of December 2025. Here are some examples:
- TradeDay: $220–$275
- Apex Trader Funding: $137–$207
- Funded Trading Plus: $499
If you fail an evaluation, many firms charge a reset fee, usually between $60 and $80 per attempt. Additionally, some firms impose activation fees for live accounts, which can range from $0 to $800. For traders dealing with futures, data feed fees can add another $130 per month per exchange (e.g., CME or NYMEX), as exchanges classify funded traders as professionals. On top of that, trading commissions typically cost $6 to $8 for a full trade on standard futures contracts or approximately $1 per contract for micro-futures.
It’s also worth checking refund policies after your first payout. Some firms include free retakes in their challenge fees, while others charge for each new attempt.
How Profit Sharing and Payouts Work
Profit splits determine how much of your trading earnings you keep. Most firms offer splits ranging from 50% to 90%, with some even providing 100% on your first $10,000 or $25,000 before switching to a lower percentage. For instance:
- Topstep: Keeps 100% of the first $10,000, then 90% on additional profits.
- Apex Trader Funding: Offers 100% of the first $25,000, then drops to a 90% split.
Payout schedules vary widely. Some firms process withdrawals daily, while others operate on cycles of 5 to 10 days, bi-weekly, or monthly. For example:
- FundedNext: Promises 24-hour processing and compensates $1,000 if they miss the deadline.
- Blue Guardian: Guarantees 24-hour payouts, allowing traders to keep 100% of profits if there’s a delay.
Most established firms take about 3 to 7 business days for standard payout processing.
To qualify for withdrawals, you usually need to meet minimum trading day requirements - commonly 5 to 10 days - and follow all trading rules, such as daily loss limits and restrictions on trading during major news events. Some firms also enforce a minimum withdrawal amount, typically around $250, to offset transaction fees. To avoid delays, make sure your payment account information (via platforms like Rise, Plane, or PayPal) is verified in advance.
Understanding drawdown limits is just as important as fees and profit splits when planning your trading strategy.
Drawdown Limits and Profit Calculations
Your agreement with a prop firm will outline the maximum drawdown limits, which can be calculated based on either your account balance or equity. Here’s the difference:
- Balance-based drawdowns: Only consider closed trades.
- Equity-based drawdowns: Include open positions, which means holding trades overnight or during volatile periods could bring you closer to breaching your limits.
Daily loss limits, often expressed as a percentage of your starting balance, cap how much you can lose in one day. Exceeding these limits usually results in account termination without a refund. Some firms use trailing drawdowns that adjust upward as your profits grow, while others stick to static drawdowns tied to your starting balance.
It’s also crucial to know how often profit targets and drawdown limits reset - daily, weekly, or monthly. Firms that calculate profits based on equity might show you’ve hit a target even if your winning trades are still open, which could lead to confusion when it’s time to withdraw funds.
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Trading Rules and Risk Limits
Prop firm trading rules are designed to safeguard capital but can also impact how you trade. Understanding these rules is crucial to avoid account suspension. Let’s dive into how daily risk controls and trading restrictions can shape your trading approach.
Daily Loss and Drawdown Limits
Daily loss and drawdown limits are key components of a prop firm’s risk management framework. Typically, these limits range between 5% and 10% of your account balance. As HighStrike LLC explains:
"The concept of drawdown limit is one of the primary tools used. Such limits ensure that traders never lose more than a certain percentage of the account's depository, that is typically between 5% to 10%."
Exceeding these limits can lead to account suspension or closure. To stay within these boundaries, many traders follow the 2% rule, which involves risking no more than 2% of your account balance on a single trade. Using stop-loss orders and carefully managing your position sizes are also essential to avoid breaching these thresholds.
Additionally, ensure your trade sizes comply with any leverage or position limits set by the firm. Maintaining discipline in position management is critical for avoiding significant losses and keeping your funded status intact.
Beyond these loss limits, specific trading rules can further shape your strategy.
Trading Strategy Rules and Restrictions
Prop firms often impose restrictions on certain trading strategies. Commonly banned practices include latency arbitrage, hedge arbitrage, price feed exploitation, excessive scalping (where over 50% of trades are held for less than a minute), and manipulative or coordinated trading. If your strategy relies on rapid execution or exploiting price inefficiencies, it may conflict with the firm’s rules.
It’s also worth noting that trading rules can vary between the evaluation and funded phases. For instance, some firms may permit news trading during the evaluation stage but restrict it once you’re funded. Similarly, holding positions over weekends or during major economic announcements might only be allowed during specific phases. Understanding these differences is crucial for ensuring your trading plan aligns with the firm’s rules at every stage. Carefully review the terms for both evaluation and funded accounts to avoid surprises when transitioning between the two.
How Simulated Trading Works
During evaluation phases, most prop firms use simulated trading environments. Some firms even extend these simulated accounts into the funded phase, allowing traders to earn real profits while operating in a simulated market environment. However, these environments often feature "simulated spreads" that may not perfectly reflect the dynamic spreads of live markets.
This distinction matters, especially if your strategy is sensitive to factors like slippage, real-time market depth, or tight spreads. Transitioning from evaluation to a funded account could bring noticeable changes in execution speed, liquidity, and spread behavior.
To prepare, confirm how simulated orders, slippage, and spreads compare to live market conditions. These technical details can significantly affect your trading results and help you decide if the firm’s setup aligns with your strategy.
Warning Signs and Legal Terms to Check
When evaluating prop firms, it's not just about fees and profit splits - understanding the legal terms and spotting potential red flags is just as important. In the U.S., many prop firms operate with minimal oversight from agencies like the SEC, CFTC, or NFA. This lack of regulation means traders don’t always get the same protections they would with traditional brokerage accounts. Carefully reviewing legal terms can help you avoid surprises that could eat into your profits.
Banned Trading Practices and Consequences
Prop firms often restrict certain trading strategies, such as arbitrage or account copying, to safeguard their capital. The real challenge lies not in the existence of these rules but in how vaguely they are enforced. For instance, some firms impose hidden policies like a "30% rule", which caps daily profits at 30% of your total gains. These rules are sometimes buried in FAQs or support documents rather than being clearly outlined in the main terms. Under EU law, such essential rules hidden in FAQs might not even be enforceable. However, U.S. traders generally don’t enjoy the same level of protection against these hidden requirements.
Refund Policies and Dispute Resolution
Most evaluation fees are non-refundable, so it’s crucial to understand refund policies and dispute resolution procedures upfront. Many firms include liability clauses that shield them from accountability for issues like technical glitches, payout delays, or sudden account closures. Without clear paths for escalating disputes or access to third-party arbitration, traders have limited options if a firm changes payout terms or withholds profits.
Additionally, check if the terms specify a governing law and jurisdiction. Many firms require disputes to be resolved under U.S. law, often in specific states. For traders outside the U.S., this can make legal action costly and impractical. Knowing these limitations ahead of time can help you assess your risk and prepare accordingly. These policies often tie directly into the identity verification and compliance processes discussed below.
Identity Verification and Compliance Rules
To activate accounts or process payouts, most prop firms require KYC (Know Your Customer) and AML (Anti-Money Laundering) verification. This typically involves submitting a government-issued ID, proof of address, and sometimes additional documents like bank statements.
Delays or account suspensions can occur if KYC documentation is incomplete. Some firms only disclose these requirements after you’ve passed the evaluation, leading to unexpected hurdles when withdrawing profits. To avoid surprises, carefully review the terms to understand what documents are needed, how long the verification process takes, and any restrictions based on your location or citizenship.
Firms with unclear compliance procedures should be approached with caution. Reputable firms treat KYC as a standard process and offer clear timelines for approval, ensuring a smoother experience for traders.
Your Prop Firm Terms Review Checklist
When considering a prop firm, it's crucial to thoroughly evaluate their terms to ensure they align with your trading goals. Here's a guide to help you navigate this process.
Start by verifying the firm's legitimacy. Look into their operational history - firms with at least two years of experience tend to be more stable. Confirm that their physical address isn’t just a P.O. box, and check government databases for any complaints or disciplinary actions. Be cautious of newer firms that rely on aggressive marketing but lack a proven track record; this could be a red flag.
Examine the financial terms carefully. Add up all potential costs, including evaluation fees, monthly subscriptions, profit splits, and withdrawal charges. Pay attention to profit targets, not just as percentages but also in dollar terms - a 10% target on a $50,000 account means you’ll need to generate $5,000 in profits. Clarify payout schedules and watch for vague language around profit-sharing, which could mask unfavorable conditions.
Ensure the trading rules fit your strategy. For example, if you hold overnight positions, confirm that the firm allows it. If you use Expert Advisors, check whether they permit them; some firms restrict off-the-shelf EAs, grid systems, or high-frequency strategies. Also, review the firm's drawdown limits - both daily and overall - and understand if they are static or trailing, as this can significantly affect your risk management approach.
Evaluate transparency and support. Check independent reviews on trading forums, reach out to customer support with specific questions about fees and payouts, and assess how clearly they communicate their terms. Firms that rely on overly complicated legal jargon, avoid providing clear documentation, or give evasive answers are worth scrutinizing.
Keep in mind that fewer than 1% of traders achieve substantial payouts. Given the limited regulatory oversight in this space, it's essential to conduct thorough due diligence. Review every detail of the firm's terms and ask for written clarification on anything that seems unclear. This level of care can help you avoid potential pitfalls.
FAQs
What hidden fees should you look out for when joining a prop trading firm?
When checking out a prop trading firm, it's crucial to watch for hidden fees that may not be apparent at first glance. These might include non-refundable entry or challenge fees, recurring platform or software charges, or performance-based fees that eat into your profit share. Some firms also tack on costs for extras like training programs or proprietary tools.
Take the time to thoroughly review the firm's terms and conditions. Make sure you fully understand all potential costs upfront, and prioritize firms with a clear and transparent fee structure to steer clear of unexpected expenses down the road.
How do profit splits and payouts work at prop trading firms?
Prop trading firms generally provide profit splits that favor traders, typically ranging between 70% and 90%. The specific percentage often depends on the company’s rules and how well you perform.
Payouts are commonly made on a bi-weekly or monthly basis. Some firms process payments quite fast - within 24 to 48 hours - while others might take a bit longer. It’s important to go over the payout terms thoroughly to make sure they meet your expectations.
What protections do traders have when working with international prop firms?
In the United States, most proprietary trading firms aren't regulated in the same way as traditional financial institutions. However, if you're trading with a firm registered with organizations like the SEC, CFTC, or FINRA, you might benefit from added safeguards. These can include segregation of funds, greater transparency, and adherence to AML/KYC regulations.
On the other hand, many international prop firms operate in environments with little to no regulation. This lack of oversight can introduce risks like disputes over payouts, unsecured funds, or limited accountability. To stay protected, take time to thoroughly review a firm's terms and conditions. Focus on firms with clear policies and a solid track record for fairness and reliability.