Are Forex Prop Firms A Scam?

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 CityTradersImperiumOpens in a new tab.

Some prop firms on our best prop firms listOpens in a new tab.

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 MyForexFundsOpens in a new tab.

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:

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 forexOpens in a new tab.

How To Spot If A Forex Prop Firm Is A Scam?

It’s not enough to just assume that all forex prop firmsOpens in a new tab.

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…

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 firmsOpens in a new tab.

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. MyForexFundsOpens in a new tab.

A legitimate prop firm is going to have a few things. Firstly, a good amount of reviews on TrustpilotOpens in a new tab.

Features of a legitimate prop firm you’ll want to look for:

How To Avoid Being Scammed By Forex Prop Firms?

Let’s hope that none of the top prop firmsOpens in a new tab.

Lots of forex traders wrongly treat their funded account as their main account. For example, many FTMO tradersOpens in a new tab.

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 $10,000Opens in a new tab.

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?

  1. Get funding from at least 2 prop firms.
  2. Withdraw from your prop firms monthly, don’t compound the accounts.
  3. Put a large percentage of your withdrawal into your personal trading account.
  4. Use a forex trade copierOpens in a new tab.
  5. Get funded from more prop firms.
  6. 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 processOpens in a new tab.

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 BluFxOpens in a new tab.

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 fundedOpens in a new tab.

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!

Kyle Townsend

Kyle Townsend is the founder of Forex Broker Report, an experienced forex trader and an advocate for funding options for retail forex traders.

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