With so many new forex prop firms coming out and some only offering demo accounts, it makes you wonder, are prop firms just a scam? Will I ever pass the challenge or even get paid? You often read reviews from traders that have failed the prop firm challenges, saying how it’s all a scam and to not waste your time…
The simple answer is that forex prop firms are not a scam. They offer a genuine way for consistently profitable traders to make substantial growth in terms of account size. With that being said, the rules implemented by prop firms do make it hard for less profitable traders or traders that are having a bad month… Let’s find out more.
How Do Forex Prop Firms Work?
To understand if prop firms are a scam, we first need to understand how they actually work. The concept of a prop firm is very simple – you pay them for a challenge, or instant funding, in exchange for a very large sized account. You will trade the account for a month, sticking to the trading rules, then get a profit split of around 70% for your hard work.
It’s a very simple concept and prop firms have been around for a very long time now. They’re only really becoming available to retail clients over the last 3 or 4 years however, as before this they were just limited to licensed fund managers and ex-hedge fund traders.
So How Do Prop Firms Make Money?
Prop firms typically make money through 2 main avenues:
- By taking profit splits from profitable traders
- By selling funded account challenges
With over 70% of forex traders not being profitable, it’s ridiculous to think that prop firms don’t make money of traders failing the trading challenges. Does this mean they’re bad? Absolutely not, if you’re profitable and going to be able to take on funding from a company like CityTradersImperium for example, it makes no difference to you how they obtained the capital to fund you with.
Some prop firms on our best prop firms list are even upfront about the fact they will have you trading on a funded demo account. Their business model relies on the trading challenge sales and they essentially pay your demo profits from sales – so they need less capital to operate than a company like FTMO that offers live funded accounts up to $400,000.
Prop Firms Are Legit, But Are They Realistic?
I’m not going to sugar coat it, the majority of forex traders will never get funding from a prop firm. The only hope most traders have is using an instant funding model, offered by companies like MyForexFunds and DT4X Trader. This isn’t a reflection on prop firms though, it comes down to traders themselves.
The large majority (around 70%) of forex traders aren’t profitable, at all. Most of the remaining 30% don’t really make much either, I’d say only around 10% of those traders are consistently out performing the markets and managing their risk properly.
Prop firms will put in place a profit target and drawdown limit. This will usually look like:
- 10% profit target
- 10% drawdown limit
This is a very simple ask but most traders are never going to be able to consistently make 10%, without losing 10% first. Is this unfair? No, this is completely fair and I wouldn’t trust someone with my money if they couldn’t demonstrate this kind of return too.
The reality is that forex prop firms are very realistic for profitable traders – not just traders. If you aren’t actually profitable within the markets then I would recommend learning to trade forex first before even considering funding.
How To Spot If A Forex Prop Firm Is A Scam?
It’s not enough to just assume that all forex prop firms are not a scam, because without a doubt, some of them will be. It’s crucial to do your due diligence before signing up to a firm to avoid being scammed. Some traders can spend months trying to pass challenges with companies, which will never result in them getting funded, all because they’re using these small, unknown companies with terrible reviews.
What A Scam Prop Firm Looks Like?
Typically, scam prop firms are going to be fairly easy to spot and they will all have a lot of common features…
- No Trustpilot presence (or very limited)
- Low quality website (looks cheap, spelling mistakes)
- Lack of content online (social media and website)
- Not mentioned by other traders online
- Not featured on our top prop firms list
- Unusual funding options
- Promising HUGE funding with an EASY challenge
- Making a challenge much too hard (impossible to pass)
- Lack of phone support/live chat
If the funding option you’re looking at has many of these features, I’d definitely recommend staying clear. In 2021, luckily there are so many prop firms that are completely legit – you really don’t need to experiment with riskier options.
What A Legit Prop Firm Looks Like?
To know really what a scam prop firm looks like, it’s important to know what a legit prop firm looks like. MyForexFunds is a completely legit, long standing, reputable prop firm that has paid out a huge amount of traders. If you’ve read our full, comprehensive review, you’ll know that it’s one of the strongest contenders in our Top Prop Firms List.
A legitimate prop firm is going to have a few things. Firstly, a good amount of reviews on Trustpilot (100+). It’s also going to have a good score on Trustpilot, and a lot of useful comments for you to read through. I’d highly recommend avoid any firm that has a lot of negative reviews, as there’s so many forex prop firms these days it’s not worth taking a chance with a potential scam.
Features of a legitimate prop firm you’ll want to look for:
- Great Trustpilot presence
- Modern, responsive website
- Realistic funding options
- Good trading conditions
- Responsive support team (I’d recommend contacting them)
- Payout proof from other traders (social media is good for this)
- Being featured on our best prop firms list
How To Avoid Being Scammed By Forex Prop Firms?
Let’s hope that none of the top prop firms are going to scam us, ever. If the company you’re thinking about taking funding from has great reviews and has been in the industry for a long time, it’s very unlikely that they’re just going to stop paying you or start squeezing traders out of funding accounts. However, how can we limit the possibility of being scammed and it ruining our trading careers? This is where diversification comes in…
Lots of forex traders wrongly treat their funded account as their main account. For example, many FTMO traders I know will no longer trade their own, small capital – they will just put 100% of their energy into the funded account. This is risky, in my opinion and really shouldn’t be done.
The Safe Way To Use Prop Firms
The safest way to trade with forex prop firms is to use multiple prop firms, whilst still having your own trading capital as your main account. Why do I recommend this? By using multiple companies for your funding, for example using MyForexFunds for an instant $10,000 and DT4X Trader for an instant $50,000, you’re hedging your risk so if one of these prop firms goes down – you won’t lose everything!
When you take profits out of your prop firm account every month, you should be putting at least some of this back into your own forex trading account, to compound it. What does this look like in principle?
- Get funding from at least 2 prop firms.
- Withdraw from your prop firms monthly, don’t compound the accounts.
- Put a large percentage of your withdrawal into your personal trading account.
- Use a forex trade copier like MT4 Copier to automatically copy trades onto all of your accounts.
- Get funded from more prop firms.
- Repeat the process.
By using a process like this, you can drastically limit your risk from any one prop firm. A lot of funded traders don’t think of this and nor realise that a forex trade copier can automate this whole process for you – it’s literally a no brainer!
The Risky Way To Use Prop Firms
The wrong way to use prop firms is simply to not diversify your risk. When traders finally get funding they ignore their own small accounts. I understand why, if DT4X Trader have given you $50,000, why would you bother trading your own $3000 account?
However, if your chosen prop firm runs into financial difficulties, you’ve put all of your eggs in one basket. Not only are you taking on the additional risk, you’re also missing out on hundreds of trades on your personal accounts which could lead to a huge compounded return over the few years that you’re FTMO funded for!
In Summary, Are Forex Prop Firms Scams?
In conclusion, forex prop firms are not a scam and they actually provide a great way for traders to scale their capital and take trading from a hobby to a career. With that being said, getting funded from a prop firm isn’t easy and the majority of traders will fail. There are also red flags to look out for when choosing which company with work with.
I’d highly recommend using a prop firm with great reviews online, preferably one of the most well known companies like MyForexFunds or FTMO. Not only that, I’d recommend using multiple prop firms simultaneously by using a trade copier, to reduce your risk and exposure to each company.
If you have any questions please do let me know in the comments below – I’ll do my best to help you!