What is a funded trading account, how does it work, and how to get one?
What is a funded account?
The term "funded account" refers to a trading account in which a third party provides the capital, or funds the account, for a trader to use. Prop firms or brokers typically offer this set-up as part of their capital allocation program.
The purpose of a funded account is simple: traders need access to capital to grow their careers. However, even talented traders might struggle to fund their trading accounts adequately, which is where prop trading comes in handy.
Funded accounts work like normal trading accounts, but there are often restrictions imposed by the prop firm, such as maximum leverage, restrictions on instruments traded, and usage of certain tools like expert advisors. Some prop programs might also ban certain trading styles, such as scalping and arbitrage.
It is important to understand that the funds in the funded account never belong to the trader, but rather to the company that provided them. The trader only receives a share of the profits generated by his trading activity.
What is a funded trader?
A funded trader is a trader who is part of a capital allocation program offered by a prop trading firm or broker.
While some prop trading programs will charge an up-front fee to join their program and get the chance to receive funding, others are free of charge and generate their revenue from the profit share arrangement with the trader.
The upside for the trader is obvious: They get access to capital, which sometimes can be a seven-figure amount, drastically scaling their profit potential. On the other hand, prop firms gain access to talent, often without formally employing them.
How does a funded account work?
A funded account provides traders with capital to trade without using their own money. There are two primary ways to obtain a funded account: passing an evaluation phase or purchasing instant funding.
To qualify for a funded account, many firms require traders to pass an evaluation period or "challenge". This period allows the firm to assess a trader's profitability and risk management skills. The evaluation typically involves specific profit targets and maximum drawdown limits. Traders must demonstrate consistent profitability and responsible risk management to succeed.
Some firms charge a fee to participate in the evaluation, while others do not. This phase also offers a valuable opportunity to familiarize oneself with the firm's rules and regulations. Upon successfully completing the evaluation, traders are granted access to a funded account.
An alternative to the evaluation process is to purchase instant funding. This option allows traders to bypass the evaluation and immediately receive a funded account. Instant-funded accounts typically come with higher joining fees. Additionally, traders have less time to acclimate to the firm's rules and restrictions compared to those who go through the evaluation phase.
Prop firms provide capital to traders in exchange for a share of the profits generated. The profit-sharing percentage varies based on factors such as the trader's experience level and any upfront fees involved. By offering funded accounts, prop firms aim to identify and partner with skilled traders who can generate consistent profits.
Funded vs. regular account
At first, a funded account may appear to be a regular trading account. The prop firm may even use MetaTrader 4 or another popular trading platform. However, funded accounts will often have certain restrictions and limitations.
For instance, brokers may cap the leverage on funded accounts, but they may offer up to 30:1 leverage on regular accounts. This makes sense, as high leverage could potentially lead to excessive risks and a significant drawdown.
There could also be restrictions on certain trading styles (scalping), strategies (news trading), and tools (usage of expert advisors).
If you trade on a regular account, you will have full freedom over how you use your capital and which tools and strategies you implement. However, your own capital is at risk, and it can be difficult to fund the account enough to turn your hobby into a career.
Who is a funded account for?
Funded accounts are primarily for talented traders who lack access to capital. Beginners should avoid it, as they risk squandering a significant amount of money on completing challenges without a genuine chance to secure a funded account. If you have just recently started to learn about trading, you should continue your journey with a risk-free demo account.
Once you have gained sufficient experience—preferably also on your personal live account—you can apply to join a capital allocation program.
Some traders believe that prop trading will be less challenging because their money is not at stake. Some programs do not require you to fund the account, but you will pay fees to join and feel pressure to progress.
Traders must also be aware that while the goal of joining a prop trading program is to make money, capital preservation is crucial. Taking excessive risks could result in hitting the maximum drawdown level and undoing your hard work.
Risks of funded accounts
The fact that most funding accounts do not require you to invest any of your money could make funded accounts sound like a risk-free proposal. However, that is not the case, as:
1) Jumping from challenge to challenge between various prop firms and programs could cost you a lot of money in joining fees.
2) Regulatory issues have increased lately, with some prop trading firms forced to close. Make sure you are using a reputable and established company.
3) Unfamiliarity with the prop trading firm's rules is not an excuse and could result in suspension from the program without a refund of the joining fee.
Pros
Access to capital is the most obvious advantage, as traders who typically have limited funds available for trading could potentially manage 7-figure accounts if they demonstrate their skills.
Limited risk: In the end, it is the money of the prop firm that is at stake, not the trader´s personal funds.
Supportive environment: Joining a prop firm could potentially put you in touch with other successful traders, or you could become part of a community. Exchanging ideas and experiences can be helpful.
Cons
All prop firms will have strict rules about what is allowed and what is not. Some traders may find these rules excessive, which could potentially hinder their progress. For example, there is nothing wrong with scalping or news trading if a trader can generate profits from it, but some prop firms do not allow those activities.
Withdrawing funds: With funded accounts, you will have limitations on how you can access your money, whereas, with personal accounts, you have complete freedom over when and how much you wish to withdraw.
Regulatory risks: In the past, some prop firms abruptly ended their programs, leaving many traders exposed and uncertain about their pending profit share. Always do your research and choose a reputable company.
How to choose a funded account?
Before picking a funded trader program, it is crucial to conduct some research. If the program is run by a broker, the company should have a good reputation and trading conditions.
If it is a pure prop trading firm, a trader should check the online reviews and closely review the Terms & Conditions. An overcomplicated fee/profit share structure or lack of transparency could be a red flag. Ideally, all upfront fees should be transparently disclosed from the outset.
For some traders, the trading platform will also be an important factor. A trader who is used to MT4 might struggle with the trading platform used by some prop firms.
Conclusion
Funded accounts provide traders with a tremendous opportunity to build their trading career by giving them access to capital. However, traders should be aware that the structure and rules of the capital allocation programs vary significantly, hence the need for proper due diligence before choosing one.
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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.
