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Propfirms are companies offering traders an opportunity to use their skills to trade for them. They claim to offer real capital for you to trade, after passing what they call an evaluation test

Your relation with a propfirm goes through 3 phases in general:

1. The first phase is called the evaluation test phase

You start your relation with a propfirm by paying them to let you pass an evaluation test. During this evaluation test, you are given a virtual capital to trade with, a profit target that you should reach in a specific period of time and very strict maximum drawdown rules.

At the end, of this period of time, if you reached the profit goal without breaking any rule, then you successfully passed your evaluation test. And you can move on to the next phase

On the other side, if you didn't reach your profit goal, or you did break the rules, then you failed your test, and you should pay again for another evaluation test and start over the first phase

2. The second phase is where you trade to generate real profit

After you successfully passed your evaluation test, the propfirm will give you a digital certificate and make you sign a contract

The propfirm will claim allocating real capital for you to trade. This is not entirely true. What really happens is that the propfirm will use the money they collect from other customers who fail the evaluation tests, to pay you if you generate profit during this phase.

Propfirms make big profits from their customers who fail their evaluation tests, this profit is largely sufficient to pay anyone who succeed their evaluation test and later request a payout. Generally speaking only 10% of the customers pass evaluation tests

3. The third phase is when you raise a flag on the propfirm internal systems

Propfirms monitor all their customers activity. If you generate profit in a consistant manner, the propfirm will detect you and will flag your profile. This is not a bad thing

Each propfirm has its own way to manage their operational risk. If you generate much profit, then the propfirm will need to pay you from the money they collect from their customers, so you are basically eating into their profit. The solution for this issue is that propfirms will copy your trades while adding an additional layer of risk management so that they will reproduce your trades on their side. This way, they will pay you from the profit they generate from copying your trades. Off course, this will not happen the first month you generate profit. You need to consistantly generate profit on a long period of time for this to happen.

Rithmic is the company that provides the price and trade connection that you can use from your NinjaTrader software.

Suppose that you started your own propfirm company, then the first thing you need to do is to sign a contract with Rithmic to provide your users with NinjaTrader connections. Then link your backend service with Rithmic service and each time you get a new user, Rithmic will allocate him a new connection. Rithmic will also provide all transaction and order history for each user.

Yes. eventhough only 10% of propfirms users pass their evaluation tests. You can be one of those 10%

With propfirms, even though they claim allocating real capital for you to trade, your are never trading real money. You are always trading a virtual account with virtual money on it. But the profit you generate on this virtual account will be paid to you in real money.

Propfirms will decide to copy the trades of successful traders internally as a way to generate more income

So as you can see, propfirms don't have a legal issue with letting retail traders manage the money of other people. Legally speaking, they are paying you for a service that you provide for them, the service is your trading signals.

To answer this question one should define his objectifs first. For myself, my objectif is to have a long term consistent income from payouts

This target objectif makes chosing a Propfirm be based on the following criterias:

• Criteria related to monthly payments

This is one the most important criteria when first looking into the offers of a propfirm. If you are aiming to create a consistent flow of income from payouts, you should maximize your gains, and minimize your expenses. There are three types of propfrim programs or offers.

• Programs that requires monthly payments from the start and always
• Programs that requires one payment only at the beginning
• Programs that requires cheap monthly payment at the beginning at the evaluation phase, then one payment when you pass evaluation

The propfirms to avoid are of the first type. You should avoid propfirms that requires you to pay fixed monthly payment. Imagine you have the objectif to use a propfirm for 12 months. and that the monthly cost of that propfirm is 80$. This will total to 80 * 12 = 960$ per account per year. Suppose you open 10 accounts, that would cost you 9600$ per year. That is a very high amount that you can avoid paying.

The other two types of programs allows you to only pay at the start of the program only. For example you can pay 140$ once for a 50k account for as long as the account is active. As you can see, the difference between the two expenses is very obvious.

• Criteria related to trailing stoploss

Trailing stop loss is a mechanism used by propfirms to liquidate your account if you go below a certain loss level. This loss level is calculated based on the level of profit of your account. For example, let's say the trailing stoploss is a trailing 2000$ End of day, this means that the stoploss level (notice that this stoploss is not a price, but a PnL value) is recalculated at each day (after the trading session is closed) and is equal to your current PnL minus 2000$. This stoploss level can be trailing meaning it will go up following your increasing PnL. When you start the account of 50k$, it is located at 48k$, and if your PnL reaches 55k$ for example, it will be recalculated to 55k - 2k = 53k. Notice that, the stoploss level only goes up, meaning if after that, if your PnL suffers from multiple losing days and hit 53k (down from 55k) your account will be liquidated.

Now that you have an idea about trailing stoploss. You should know that there 3 types of stoploss that propfirms propose:

• Realime Trailing Stoploss

This one you should run from and never use. You can never succeed in this realtime stoploss mechanism because it is designed to increase stoploss level at the highest PnL level that you reach in realtime during the day and when a trade is still open. This trailing stoploss is designed to ripp you off. Stay away from it.

• End of day (EOD) Trailing Stoploss

This is an acceptable trailing stoploss mode. I say acceptable because it is not the ideal one. But this is the most common mechanism used by propfirms so we can use it

If you intend to target long term consistent income you need to withdraw your payouts frequently on this trailing stoploss mode. Let me give you an example, suppose you want to accumulate profit on a propfirm account for 12 months, then you want to withdraw your gains. and suppose you reached 20k$ profit on a 50k$ account after 10 months of trading. Your trailing stoploss will be at 20k -2k = 18k.

Suppose now that the strategy has a very bad week and it lost for 5 consecutive days and you hit the stoploss level of 18k. Now you lost all your gains

Now if you have withdrawn your gains periodically at each 2k profit step, you would have lost only 2k, and it doesn't matter if you lost your account because you would have withdrawn the money from it already.

• Static Stoploss

The Static stoploss mode is very rare to find among propfirm offers. The static stoploss will be fixed at an initial value and will not follow your profit.

This mode is an ideal mode for long term payouts because you can accumulate profit without fear of blowing the account

As you will see later, some propfirms that offer this mode, will add other constraints to their offer to minimize your profits

• Criteria related to limited contract size

One of the hidden constraints propfirms add to their offers is limiting your maximum contract size per trade. By doing this they limit your capacity to make large profits in a small period of time.

For example, they will offer a 1 day validation period, but with only 3 maximum contracts on the Micros. If you read between the lines of this constraint, it is a way for the propfirm to guarantee that you spend more time to reach your validation or payout target, and thus pay them more before they give you a payout.

Now that you are knowledgable of the different aspects of how to evaluate a propfirm offer and read between the lines of their programs, lets dive into real examples

For the sake of simplicity, I will only focus on 50k account offers and I will challenge the propfirms against the criteria I have defined above