Can I Lose Money In Prop Trading?
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Yes, you can lose money in prop trading. Studies show over 90% of prop traders fail to sustain profitability due to inadequate risk management or lack of experience. While most proprietary trading firms cover trading capital, losses beyond set limits can lead to account suspension or termination. Some firms may require a refundable fee or charge for platform access, which you risk losing if performance targets aren't met.
Proprietary trading offers access to large capital and profit potential through leveraged accounts, but traders face significant risks like market volatility, strict performance targets, and profit-sharing requirements. Success depends on trading skills, emotional discipline, and the ability to navigate firm-imposed restrictions, fees, and job insecurity. Your success rate reflects how well you can handle the risks.
This article will explain how a prop firm works, what results in you losing money, the possible consequences, and how to manage the risks. Read on.
The short answer is yes — you can actually lose 100% of your deposit used as a risk contribution, and sometimes more than that. Let's discuss a few examples of how prop traders can lose funds and see the potential extent of these losses in each case:
Poor risk management. Failing to use proper risk controls, like stop-loss orders, can cause significant losses or even wipe out an entire trading account, especially when using high leverage.
Unforeseen economic events. Unexpected events, such as central bank actions or geopolitical crises, can trigger massive market swings. For instance, the 2015 Swiss Franc crisis caused traders to incur sudden losses that exceeded account balances, leaving them in debt to prop firms.
Emotional trading. Impulsive decisions driven by emotions, such as over-trading, can quickly drain a trader's capital. A notable example is UBS's $2.3 billion loss in 2012 due to unauthorized speculative trading by Kweku Adoboli, highlighting how reckless trading can lead to catastrophic losses.
These risks underscore the importance of strong risk management, emotional control, and awareness of economic events in prop trading.
How do proprietary trading firms work?
Proprietary trading firms provide traders access to company capital to trade stocks, currencies, commodities, and derivatives. Profits are shared based on pre-agreed terms, allowing firms to access trading talent without paying salaries or assuming full regulatory burdens.
Traders undergo a rigorous evaluation process through demos or live accounts to prove their skills. Successful candidates receive capital allocation, often with leverage, while adhering to strict risk management rules like stop-loss limits and position-sizing requirements. Performance is continuously monitored, with traders earning a share of the profits while maintaining high trading standards. Below is a summary of how proprietary trading firms work.
Application. Traders apply by submitting records or completing evaluations.
Evaluation. Firms assess trading skills and risk management abilities.
Capital allocation. Successful traders receive firm capital, sometimes with a refundable deposit.
Leverage trading. Traders use firm-provided leverage for larger trades.
Risk management. Firms enforce strict rules like stop-loss and drawdown limits.
Profit sharing. Profits are split based on agreed percentages.
Performance monitoring. Firms review traders’ performance and enforce compliance.
Is prop trading risky?
Prop trading carries significant risks despite not using personal funds. Here’s why:
Poor performance. Market volatility, bad trading decisions, and unexpected economic events can lead to losses, impacting profit-sharing and potentially ending trading privileges.
Financial loss. Deposits aren’t insured and can be exposed to fraud due to loose regulation, so traders should only risk what they can afford to lose.
Strict risk rules. Firms enforce rigid risk management policies that may limit trading flexibility, causing missed opportunities or forced exits.
Intellectual property risk. Successful traders risk their strategies being reverse-engineered by firms, reducing long-term profitability.
What happens if you lose money prop trading?
Losing money in prop trading can affect both your trading account and career. When trading with a prop firm, losses come from the firm’s capital, not your own money. However, repeated losses may reduce your profit share or lead to account closure.
Consistent losses can damage your trading reputation, making it harder to get funded again, but how do prop firms handle losses?
Prop firms handle losses by offering training, mentorship, and regular performance reviews to help traders improve. They enforce strict risk management rules to prevent significant losses. If a trader continues to underperform, the firm may terminate their account.
Here is a breakdown of what happens when you lose money on a funded account.
Maximum drawdown rule. Most funded accounts have a maximum drawdown limit. Exceeding this limit results in losing trading privileges or account closure due to poor risk management.
Loss coverage. In rare cases, some accounts cover trading losses, meaning you won’t pay out of pocket. However, these accounts come with strict performance standards.
Fee-based challenges. During evaluation challenges, traders pay a fee to prove their skills. If they lose, they won’t owe more than the initial fee but may need to pay again to retry.
Account closure. Breaking account rules, such as exceeding drawdown limits, can lead to immediate account termination to prevent further losses.
Will you owe money if you lose during live prop firm trading?
No, you typically won’t owe money if you lose during live prop firm trading. Most prop firms provide traders with their capital, meaning any trading losses are absorbed by the firm, not the trader. The only financial commitment traders face is the evaluation or challenge fee paid upfront, which is non-refundable regardless of trading performance.
However, traders should carefully review the terms and conditions of their agreement, as some firms might have unique policies. In reputable prop firms, traders aren’t required to make deposits or cover trading losses, ensuring their personal funds remain protected.
How to reduce risks in prop trading?
To minimize risks in prop trading:
Focus on asymmetric risk setups. Look for opportunities where the profit potential heavily outweighs the risk you’re taking. Start with a 3:1 risk-to-reward ratio, but aim for setups where you risk little to win big. Trade like a sniper, not a machine gunner.
Refine your stop-loss placement. Don’t set stop-losses without precision. Study your past trades where stop-losses got hit and the price reversed afterward. Adjust your levels to avoid getting caught in fakeouts and choppy moves.
Track every time you break your stop-loss rules. If you’ve ever ignored a stop-loss, write it down and calculate how much those lapses cost. Seeing the real damage on paper will push you to stick to your risk limits.
Avoid stacking trades on related pairs. Don’t take multiple trades in assets that move the same way, like EUR/USD and GBP/USD. If one goes south, the others will likely follow, doubling your losses instead of reducing risk.
Cut your trade sizes before big news events. During major events like inflation data or job reports, don’t close trades out of fear — just reduce their size. This lets you stay open for surprise moves without risking big losses.
Cap your rolling drawdown aggressively. Set a strict percentage — like 5% — as your maximum drawdown for the day or week. If you hit it, force yourself to step away from the screen. This keeps your losses from spiraling out of control.
Flag “hype-driven” trades. If you’re entering trades because you’re hyped up or feeling FOMO, tag them in your logbook. Review their performance later. You’ll quickly see these impulse trades rarely pay off.
Review your edge every week. Don’t wait too long to check how you’re doing. Every week, review your win rate, risk exposure, and trade outcomes to spot issues early before they cost you more.
How prop firms limit risk
Prop firms implement strict measures to protect their capital while allowing traders to operate efficiently. These risk management strategies ensure a balance between profit potential and controlled trading environments. Here’s how they manage and minimize trading risks.
Daily loss and drawdown limits. Prop firms cap daily losses and overall drawdowns. Reaching these limits may pause trading or result in account suspension, protecting the firm’s capital.
Overnight position limits. Prop firms limit the size of overnight positions to reduce the risk of losses from unexpected news and market gaps.
Strict risk management rules. Traders must follow strict rules like using stop-loss orders and limiting position sizes to prevent excessive risks.
Profit-sharing incentives. Profit-sharing motivates traders to trade responsibly, as their earnings depend on consistent performance.
Real-time risk monitoring. Advanced monitoring systems track trading activities live, enabling immediate action to mitigate risks when needed.
Regular risk reviews. Firms regularly review and adjust risk limits based on market conditions and internal policies to stay aligned with their risk tolerance.
Time-limited challenges. In evaluation models, traders must hit profit targets within set time frames, testing their ability to perform under pressure.
Is prop trading legal?
Prop trading is fully legal, though many remote prop firms operate without regulation. Since they trade with their own capital and aren’t financial service providers, they aren’t subject to strict regulatory rules. As a result, prop traders don’t need licenses, specific education, or prior experience — only the ability to trade profitably matters.
How much can I make as a day trader?
Prop trading is considered risky but can be highly lucrative for financial institutions. Traders earn based on a profit-sharing ratio influenced by factors like commissions, profitability, and trading volume, offering unlimited earning potential. While firms typically keep 10-25% of profits, traders bear 100% of losses, highlighting the asymmetric risk-reward structure in this volatile trading environment.
| Max. Leverage | Funding Up To, $ | Profit split up to, % | Min Trade Days | Trading period | No-Evaluation | Open an account | |
|---|---|---|---|---|---|---|---|
| 1:100 | 4 000 000 | 95 | 2 | Unlimited | Yes | Open an account Your capital is at risk.
|
|
| 1:30 | 200 000 | 90 | No time limits | Unlimited | No | Open an account Your capital is at risk.
|
|
| 1:100 | 2 500 000 | 90 | 3 | Unlimited | Yes | Open an account Your capital is at risk.
|
|
| 1:100 | 2 000 000 | 95 | 3 | Unlimited | Yes | Open an account Your capital is at risk.
|
|
| 1:30 | 400 000 | 80 | 10 | Unlimited | No | Open an account Your capital is at risk. |
Manage emotions and check fees to avoid prop trading losses
New traders often believe losing money in prop trading only happens when trades fail, but there’s more at play. A real danger is making rash decisions after a loss, known as revenge trading. Even with a solid strategy, emotional trading can wreck your account. Build mental discipline through demo trading to reduce emotional mistakes and improve long-term success.
Another commonly missed risk is misunderstanding how payouts work. Some firms quietly deduct data fees, commissions, and even subscription charges from your earnings. Be sure to check the details before joining any firm. Choose one with a transparent fee structure so you know exactly what you’ll take home after a successful trade.
Conclusion
Prop trading can be rewarding but comes with considerable risks. Success depends on effective risk management, emotional discipline, and adherence to firm-imposed rules. While losses are inevitable, understanding how prop firms operate and managing trades wisely can maximize profit potential and trading longevity.
FAQs
What are the risks of prop trading?
The most common risks of prop trading are inherent to the trading process itself. For example, the dangers of Forex trading spill over to your prop trading activity. On top of that, you should be ready for risks associated with strict risk management requirements, constant pressure, emotional trading, and fraud.
Is working with a prop firm worth it?
Prop trading is worth it, although it’s not recommended to invest more than you can afford to lose. Prop trading is suitable for beginner traders who don’t have enough capital to start their journey.
What is the success rate of prop firms?
Prop firms usually make between 15% and 50% of each trader’s profit, plus additional fees for opening an account and using the software. Thus, they’re most often in the money as they don’t cover losses.
What is the failure rate of prop traders?
It is estimated that only 4% of Forex traders succeed with prop firm challenges, and only 1% of traders can generate profits consistently without violating any rules.
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Team that worked on the article
Peter Emmanuel Chijioke is a professional personal finance, Forex, crypto, blockchain, NFT, and Web3 writer and a contributor to the Traders Union website. As a computer science graduate with a robust background in programming, machine learning, and blockchain technology, he possesses a comprehensive understanding of software, technologies, cryptocurrency, and Forex trading.
Having skills in blockchain technology and over 7 years of experience in crafting technical articles on trading, software, and personal finance, he brings a unique blend of theoretical knowledge and practical expertise to the table. His skill set encompasses a diverse range of personal finance technologies and industries, making him a valuable asset to any team or project focused on innovative solutions, personal finance, and investing technologies.
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).
Risk management is a risk management model that involves controlling potential losses while maximizing profits. The main risk management tools are stop loss, take profit, calculation of position volume taking into account leverage and pip value.
Forex leverage is a tool enabling traders to control larger positions with a relatively small amount of capital, amplifying potential profits and losses based on the chosen leverage ratio.
Volatility refers to the degree of variation or fluctuation in the price or value of a financial asset, such as stocks, bonds, or cryptocurrencies, over a period of time. Higher volatility indicates that an asset's price is experiencing more significant and rapid price swings, while lower volatility suggests relatively stable and gradual price movements.
Proprietary trading (prop trading) is a financial trading strategy where a financial firm or institution uses its own capital to trade in various financial markets, such as stocks, bonds, commodities, or derivatives, with the aim of generating profits for the company itself. Prop traders typically do not trade on behalf of clients but instead trade with the firm's money, taking on the associated risks and rewards.
A day trader is an individual who engages in buying and selling financial assets within the same trading day, seeking to profit from short-term price movements.
