What Are Funded Trading Accounts and How Do They Work?

Funded trading accounts allow individuals to trade financial markets using a firm’s capital rather than their own. This provides access to larger trading capital, amplifying potential profits. A key benefit is trading without risking personal savings, as the firm bears the burden of capital loss.

How Funded Trading Accounts Operate

Funded trading accounts involve a proprietary trading firm providing capital to a skilled trader. Firms offer capital, typically ranging from $5,000 to $20 million, for market transactions. The firm absorbs losses up to a predefined limit, meaning the trader is not personally liable for trading losses beyond initial evaluation fees. This allows traders to focus on strategies without depleting their personal capital.

Proprietary firms are motivated by identifying consistently profitable traders and earning a share of the profits generated. Their revenue streams primarily include fees from evaluation challenges, profit-sharing agreements, and sometimes monthly subscription fees. The firm’s role involves providing the trading infrastructure, risk management oversight, and the necessary capital. The trader’s responsibility is to execute trades, manage risk within the firm’s established parameters, and aim for consistent profitability.

The firm’s business model relies on the collective success of its funded traders and revenue from the evaluation process. They implement strict risk management protocols to protect their capital, ensuring no single trader’s losses jeopardize the firm’s financial health. This enables skilled traders to leverage substantial capital, while the firm benefits from a portion of the trading profits.

The Evaluation and Qualification Process

To obtain a funded trading account, aspiring traders undergo an evaluation process, often referred to as a “challenge.” This process involves trading on a simulated (demo) account to demonstrate proficiency and adherence to risk management rules. Challenges can be structured in one or two phases, each with specific objectives.

Common requirements during the evaluation phase include achieving a predetermined profit target, which can range from 8% to 10% of the account’s starting balance. Traders must also adhere to strict drawdown limits. Daily drawdown limits restrict losses to 3% to 5% of the daily starting balance, while overall maximum drawdown limits are 6% to 10% of the initial or peak account balance. Exceeding these limits results in immediate challenge failure and account termination.

Many evaluations also include a minimum number of trading days, often around 3 to 5 days, to demonstrate consistency. Some firms may also have consistency rules, requiring that profits from any single trading day do not constitute an overly large percentage of the total profit target. To participate in these evaluations, traders pay an upfront fee, which can range from $40 for smaller accounts to over $1,000 for larger capital allocations. These fees are a significant revenue source for many funding firms.

Key Financial Structures and Trading Rules

Once a trader successfully passes the evaluation phase and secures a funded account, specific financial structures and trading rules govern the ongoing relationship. The profit split dictates how earnings are divided between the trader and the funding firm. Common profit-sharing ratios range from 70% to 80% for the trader, with some firms offering up to 90% as performance increases. The remaining percentage is retained by the firm to cover operational costs, technology, and risk management.

In addition to profit splits, some firms may impose ongoing fees, such as monthly subscription fees for platform access or withdrawal fees. Risk management remains paramount in a funded account, with strict adherence to drawdown limits. Daily drawdown rules typically cap losses at 3% to 5% of the daily starting equity. Maximum overall drawdown limits, usually ranging from 6% to 12% of the initial or highest recorded balance, define the total permissible loss before the account is closed. Breaching these limits results in the immediate termination of the funded account and forfeiture of any accrued profits.

Trading rules also extend to various operational aspects, including allowable trading instruments, maximum position sizes, and restrictions on certain trading behaviors. While some firms permit holding positions overnight or over weekends, others may prohibit it to mitigate gap risk from market closures. Specific trading styles like high-frequency trading, arbitrage, or trading multiple accounts in opposite directions (hedging) are often prohibited to maintain fair play and prevent exploitation of the firm’s systems. Adherence to these rules is essential for maintaining a funded account and continuing to share in generated profits.