Proprietary trading firms, commonly known as prop firms, offer traders the opportunity to trade using the firm's capital after successfully passing an evaluation process. This model allows traders to access significant capital without risking their own funds, making it an attractive option for both novice and experienced traders.​

Understanding the Prop Firm Model

At their core, prop firms operate on a straightforward model:

1. Pass the Evaluation: Traders undergo an assessment to demonstrate their trading skills and adherence to risk management protocols.​

2. Become a Funded Trader: Upon successful completion, traders receive access to the firm's capital to trade in the financial markets.​

3. Profit Sharing: Traders retain a significant portion of the profits they generate, often around 90%.​

4. Risk Management: If a trader incurs losses beyond the agreed-upon limits, the firm absorbs the loss, and the trader is not personally liable.​

Step-by-Step Guide to Navigating Prop Firm Evaluations

To elucidate the process, let's consider the 50k starter account from MyFundedFutures as an example:

• Purchase: After acquiring the 50k starter evaluation, you're provided with a simulation trading account starting at a $50,000 balance.​

• Objectives: The primary goal is to achieve a profit target of $3,000 without exceeding a maximum loss limit of $2,500.​

• Rules to Observe:

  • Consistency Rule: Ensures that no single day's profit accounts for more than 50% of the total profit, promoting steady trading habits. (only apples to topstep)​

  • Minimum Trading Days: Specifies the minimum number of days required to trade during the evaluation.​

  • Daily Loss Limit: If losses reach $1,200 in a single day, trading is halted until the next day, though the account isn't considered failed.​

• Passing the Evaluation: Achieving the $3,000 profit target without breaching the $2,500 loss limit qualifies you as a funded trader. If the evaluation isn't passed, traders can opt to purchase a new account or pay a reset fee to restart the current evaluation.​

• Funded Account: Upon passing, traders transition to a funded account with two primary rules:​

  • 40% Consistency: Ensures balanced trading performance. (Your greatest day can't be more that 40% of your total balance)
    • A day of +$1000 means you have to have a total balance of $2500 to begin to withdraw money  

  • At Least 5 Winning Days: Requires a minimum of five days with profits of at least $100 each, this doesn't have to be consecutive.​

Advantages of Trading Through Prop Firms

• Reduced Personal Risk: Trading with the firm's capital minimizes personal financial risk, allowing traders to focus on strategy without the stress of significant personal loss.​

• Access to Larger Capital: For a relatively modest fee (e.g., $92 for a $2,500 trading account - marketed as a $50,000 account), traders can control substantial capital, amplifying potential returns.​

• Cost-Effective Learning: Aspiring traders can gain real-market experience without committing large sums of their own money, making it a cost-effective educational tool.​

Tax Implications for UK-Based Traders Engaging with US Prop Firms

(Disclaimer: The information provided here is for general informational purposes only and does not constitute legal or tax advice. We are not certified tax professionals, and no accountant-client or attorney-client relationship is established through this content. For guidance related to your specific situation, always consult with a qualified tax advisor or other relevant professional.)

Navigating the tax landscape is crucial for UK-based traders participating in US-based prop firms. The tax treatment hinges on the nature of the income and the trader's specific circumstances:​

• Self-Employment Income: If the income from prop trading is considered self-employment income, it should be reported in the self-employment section (SA103) of the Self Assessment tax return. This includes declaring all qualifying expenses associated with the trading activity.

Given the complexities and potential nuances in tax regulations, it's advisable to consult with a tax professional to ensure compliance and optimal tax treatment. This only ever will become something to look into once you are profitable and have made good money from prop firms. ​

Conclusion

Prop firms present the best opportunity for traders to access significant capital with limited personal financial risk. By understanding the evaluation process, adhering to trading rules, and being aware of tax obligations, traders can effectively leverage prop firms to enhance their trading careers.

RISK DISCLOSURE

Never risk money you can’t afford to lose. Futures, foreign currency, and options trading involves significant risk and isn’t suitable for everyone, traders can lose more than their initial investments. Only risk capital should be used for trading, and only those with sufficient risk capital should consider it. Past performance is not necessarily indicative of future results, and most traders do not succeed.