Ask ten people what a prop trader is and you get two answers. The older one describes a trader employed by a proprietary trading firm, paid a salary and a bonus, trading the firm's own capital with a risk manager one desk away. The newer one describes someone who paid a fee for an evaluation account online, passed it, and now trades a simulated account with a profit share agreement attached. Both use the word. Only one of them is available to a person reading this on a phone.
This article is about the retail model, because that is what the word now means in most conversations, and because the mechanics are widely misunderstood by the people paying to enter it.
How the retail model works
The trader pays a fee to attempt an evaluation. The evaluation sets a profit target, a maximum overall loss, a maximum daily loss and usually a set of conduct rules about how positions may be held and when they may be opened. Pass every condition and the firm issues a funded account, which in the retail model is normally a simulated account. Profits generated on it are paid out under a profit split, commonly weighted heavily towards the trader, after the firm reviews the trading against its rules.
The firm's revenue comes from evaluation fees and from the fact that most attempts do not reach a payout. That is not a scandal, it is the business model, and it is described plainly in how prop firms make money. What matters for the trader is that the rules are the product. The full set is unpacked in funded account rules.
The rules that actually end accounts
Profit targets are rarely the reason people fail. Drawdown rules are. A daily loss limit measured against the higher of starting balance or starting equity punishes a trader who gives back an unrealised gain, which is a very different constraint from one measured against a fixed balance. A trailing maximum loss that follows the equity peak tightens the account precisely when the trader is doing well. Read which variant you are on before the first trade, because the two behave nothing alike. The mechanics are in drawdown rules and the general concept in what drawdown means.
Then there are the conduct rules. Minimum holding times, restrictions around scheduled news, limits on weekend exposure, bans on strategies that exploit pricing rather than predict it, and consistency requirements that stop a single lucky day from carrying the whole target. Consistency rules surprise more traders than any other clause, and they exist for a reason set out in consistency rules. News restrictions are covered in news trading rules.
Read the rulebook as the specification of the account, not as small print. An evaluation you pass by breaking a clause is an evaluation you do not get paid for, and every firm reviews the trade log before releasing money.
What it is not
A funded account is not employment, and it is not client money management. In the simulated model the trader is not trading a live market position, so there is no capital to lose beyond the fee already paid. That structure is also why the arrangement usually sits outside investment regulation in most jurisdictions, a question that is being examined more closely and is discussed in prop firm regulation.
It is also not a substitute for having a method. Traders who cannot describe their entry criteria in one sentence do not suddenly become consistent because a rulebook is watching them. Trading is high-risk in any account type, and the fee is a real loss when the attempt fails.
Preparing properly
The traders who pass tend to do four unglamorous things. They size positions so that the daily loss limit cannot be reached by two losing trades, which usually means risking well under the maximum the rules permit. They trade fewer instruments than they think they should. They keep a written record, structured the way a trading journal should be. And they treat the evaluation timeline as irrelevant, because rushing to hit a target is what turns a manageable account into a breached one.
Practical preparation advice specific to the evaluation format sits in challenge tips, and the wider risk framework in risk management rules. If your interest is in running one of these businesses rather than trading in one, the comparison in broker versus prop firm is the better starting point.
The institutional version, briefly
Firms trading their own capital in equities, futures and options still exist and still hire, mostly through graduate programmes and mostly for quantitative or market-making roles. Compensation is salary plus a share of desk performance, capital is real, and risk limits are enforced by a live risk system rather than by a rulebook you agree to online. It is a different profession that happens to share a name, and confusing the two is how people end up disappointed by what a funded account actually offers.
"The evaluation is not a test of whether you can make money. It is a test of whether you can stay inside a risk envelope for weeks while making money. Most people fail the second half."
— The SGHK Team
Key Takeaways
- The retail prop model sells an evaluation: a profit target plus daily and overall loss limits, followed by a simulated funded account with a profit split.
- Drawdown definition decides difficulty. A trailing loss tied to the equity peak behaves nothing like a fixed floor measured from the starting balance.
- Consistency rules, minimum hold times and news restrictions end more accounts than missed profit targets do.
- Retail funded accounts are not employment and not client money management, and the evaluation fee is a real loss when the attempt fails.
Frequently Asked Questions
Is a funded account real money?
In the common retail model the trading account is simulated and the firm pays profit shares from its own resources after reviewing the trade log. Some firms route selected traders to live execution, so read the agreement rather than assuming either arrangement.
Why do most traders fail prop evaluations?
Usually the loss limits rather than the profit target. Position sizing that allows two bad trades to reach the daily limit, plus rule breaches around holding time, news windows or consistency, account for most terminated accounts.
How is a retail prop trader different from an institutional one?
An institutional proprietary trader is employed, paid a salary and trades the firm's real capital under a live risk system. A retail funded trader pays for an evaluation, trades to a published rulebook and receives a share of simulated profits.
About SGHK
SGHK is a FinTech company that designs and builds its own software for the trading industry: the eTrader trading platform, Launch your Broker and Launch your Prop Firm. Every product is written, hosted and supported in-house and licensed to trading firms, with the CRMs branded to them, all hosted by us in the cloud, managed by each firm and built to scale across clustered servers as our clients grow. Everything is encrypted, and each firm is the only one with access to its data and its clients' data.