How Are Profits and Losses Typically Distributed Between Traders and the Prop Firm - Prop Firm Hero (2024)

In the realm of proprietary trading, profit and loss distribution is a critical component of the relationship between traders and the firms they work with. Prop trading firms are specialized financial institutions that allow traders to use the firm’s capital for trading activities.

These arrangements typically involve a profit split, where traders and the firm share the financial outcomes of trades, usually according to a predetermined agreement. While profits are shared, losses are generally absorbed solely by the firm, insulating individual traders from financial risk beyond their control.

The proportion of the profit split varies by firm but often sees the trader retaining a significant majority of the profits. This structure aligns the interests of the trader and the firm: both are motivated to pursue successful strategies as their financial interests are linked, yet the trader can operate without the added pressure of potential personal losses.

The agreements and structures put in place account for various factors, including trader performance, market conditions, and the amount of capital provided by the firm.

Key Takeaways

  • Prop trading firms share profits with traders while typically absorbing all losses.
  • Profits are often split in favor of the trader, with common arrangements seeing a distribution such as an 80/20 split.
  • The profit and loss distribution agreement reflects multiple factors, including performance and provided capital.

Basics of Profit and Loss Distribution

When you engage in trading with a proprietary trading firm, or “prop firm,” the distribution of profits and losses follows a predefined agreement. This plays a crucial role in aligning your interests with those of the firm.

Profit Sharing: Typically, you, as a trader, are entitled to keep a percentage of the profits generated from trades. The specific share you receive depends on the agreement, which can vary widely among prop firms. Some common profit splits might be 50/50, 70/30 or even 90/10 in favor of the trader, reflecting variations in firm support, resources, and risk.

Loss Allocation: When it comes to losses, prop firms usually absorb them, provided you adhere to agreed-upon trading strategies and risk management parameters. However, it’s essential to know that if you deviate from the trading guidelines, you might be accountable for the losses incurred.

  • Capital Contribution: You might be required to put up some capital to join the firm. This “skin in the game” aligns your risk-taking with that of the firm’s.
  • Risk Management: Firms implement strict risk management protocols to protect their capital and sustainability.

Remember, the exact terms of profit and loss distribution are typically laid out in a legal document when you join the firm. It’s imperative to understand and agree upon these terms beforehand to ensure there are no surprises down the line. Always read the contract thoroughly and seek clarification on any points that are unclear to you.

Trader and Prop Firm Agreements

In prop trading, your earnings and potential losses are dictated by specific agreements. These documents define how you share profits with the prop firm and the protocols for handling losses.

Profit Sharing Models

Fixed Percentage Split: The most common model is where you, as a trader, receive a fixed percentage of the profits. For example, if the profit split is 70/30, you’ll get 70% of the profits, and the firm takes the remaining 30%.

  • 70/30 Split Example:
    • Your Profit: 70%
    • Firm’s Share: 30%

High-Water Mark Structure: Sometimes, a high-water mark applies, ensuring you make profits above the highest peak your account has reached before earnings are divided.

  • High-Water Mark Principle:
    • Profit Calculation: Only above previous peak
    • Your Share: Based on the agreement post high-water mark

Loss Absorption Protocols

Trader-Firm Agreement: Losses can either be absorbed by the firm, by you, or a combination of both. This is often outlined in your contract.

  • Absorption Examples:
    • Firm-Only: Losses are solely the firm’s responsibility.
    • Shared: Losses are distributed according to the agreed split.

Drawdown Limit: To limit losses, your trading may be subject to a drawdown limit—a threshold that if breached, may suspend your trading activities or alter profit sharing.

  • Drawdown Policy:
    • Limit: Predetermined percentage or dollar amount
    • Action: Trading halt, strategy reassessment, or modified profit shares

Factors Influencing Distribution

The division of profits and losses between traders and a prop firm hinges on several key factors. Understanding these can illuminate what you can expect in such a financial relationship.

Trader Performance

Your individual success as a trader is a primary factor affecting profit and loss distribution. Normally, the better you perform, the more favorable your share of the profits.

Prop firms often implement a merit-based system where high-performing traders are rewarded with a larger percentage of the gains. Conversely, poor performance may result in a smaller cut or even financial penalties.

Market Conditions

Economic trends and market volatility can greatly influence the distribution agreement between you and the prop firm. During volatile market conditions, risks are higher, and as such, profit-sharing ratios might be adjusted to reflect the increased risk assumed by the firm. Stable market periods might entail a more predictable and standard distribution of profits and losses.

Firm’s Financial Policies

The internal financial policies of the prop firm you trade with also dictate profit and loss distribution. These policies are often outlined in contracts and can include fixed ratios, performance benchmarks, or graduated scales based on trading milestones. It’s crucial to familiarize yourself with these details, as they directly impact your financial take-home.

Common Distribution Structures

In proprietary trading, your compensation is directly tied to performance. Understanding how profits and losses are distributed between you and the prop firm is crucial for evaluating potential earnings.

Pure Profit Split

In a pure profit split model, you share profits with the firm typically based on a predetermined agreement. For example, a common split is 50/50, but you may encounter varying ratios such as 60/40 or 70/30 favoring either the trader or the firm, depending on the firm’s policy and your level of experience.

Salary Plus Bonus

The salary plus bonus structure provides a base salary, ensuring a stable income. Additionally, you receive a bonus based on performance metrics. The bonus often reflects a percentage of the profits you generate above a certain threshold, incentivizing you to outperform expectations.

Draw Against Profits

A draw against profits arrangement gives you a regular payment, similar to a salary. This payment is then deducted from your share of the profits.

If your profits exceed the draw at the end of a period, you retain the excess. If not, you may owe a balance to the firm, depending on the agreement.

How Are Profits and Losses Typically Distributed Between Traders and the Prop Firm - Prop Firm Hero (2024)


How Are Profits and Losses Typically Distributed Between Traders and the Prop Firm - Prop Firm Hero? ›

Profit Split: The average prop firm will offer a 80-20 profit split once you become a funded trader. TFT, on the other hand, gives up to a 90% split, — even as high as 95% in some promotions — the highest in the industry.

How do prop firms pay their traders? ›

Legitimate Prop Firms:Established and regulated prop firms often pay their traders based on a profit-sharing model. Traders receive a percentage of the profits they generate for the.

What is the profit share of a prop trader? ›

While prop trading is one of the most profitable opportunities, it is affected by asymmetric risk. This means that the profit-sharing ratio may be from 75% to 90%, but you bear 100% of the risk of your trades.

What is the profit split for prop firms? ›

Agreements typically range from 50/50 to a more favorable 80/20 split after certain thresholds, with some firms offering as much as 90% to the trader.

What happens if you lose money from a prop firm? ›

In the majority of cases, you will not be responsible for covering those losses. That is the prop firm's risk, not yours. Of course, you should carefully read over the agreement with the prop firm to make sure that the terms of that agreement stipulate this.

What percentage do prop firms take? ›

A prop trading firm looks to recruit talented traders and fund them with the company's capital. The funds that a trader makes, is then split between the trader and the company. The profit share is between 50 – 95%, with the trader taking the lion's share.

What is the profit split percentage for FTMO? ›

We don't charge any commissions for withdrawals.

You don't need to score any minimum profit to receive a Profit Split, only just enough to cover the transaction fees* Whatever amount of profit you generate, you are entitled to withdraw 80% of it.

How are prop traders taxed? ›

Schedule C net income is subject to federal and state income taxes… That net income is deemed “earned income” subject to the self-employment (SE) tax. They can deduct health insurance and retirement plan deductions.

How many traders fail prop firms? ›

They're given harsh targets, limited time, no support, and huge leverage – a perfect storm! It's not surprising that 95% of traders fail their challenges!

What percentage of bonuses do prop traders get? ›

Payout Structures at Leading Prop Firms

-Percentage of Profits: The most common structure. Traders get a percentage, typically between 60-80%, of the profits they generate. The prop firm keeps the remaining percentage. This motivates traders to be as profitable as possible.

Can you make a living trading with prop firms? ›

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity. It's arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you'll earn some percentage of it.

Which is the cheapest prop firm? ›

Best cheap forex prop firms
  • FTMO: evaluations starting at $399.
  • TopStepTrader: Challenges starting at $375.
  • T4tCapital: Flexible evaluation options starting at $299.
  • Funded Trading Plus: Starting at $25.
  • Earn2Trade: $99 Mini challenge.
  • True Trading Group: $49 evaluation with a $25,000 virtual account.
Feb 27, 2024

What percentage of traders pass prop firm challenge? ›

The article from Lux Trading Firm provides slightly different results. According to it, 4% of traders, on average, pass prop firm challenges. But only 1% of traders kept their funded accounts for a reasonable amount of time.

Will I owe money to a prop firm if I lose their funds? ›

Proprietary trading firms often provide evaluation accounts where you prove your trading skills. Usually, you pay a one-time fee to enter this "challenge." If you lose money during this evaluation, you won't owe anything beyond the initial fee.

What are the disadvantages of prop firms? ›

Prop firms can have severe limitations for their evaluation period. While the drawdown limitations are the most common ones, there can be others like limitations on news trading and weekend trading. Some firms may even not allow you to hold your positions overnight.

What are the negatives of prop firms? ›

Foreign Exchange Specialist at FTMO.
  • Strict Risk Management Rules and Trading Guidelines: ...
  • Profit Sharing: ...
  • Profit Targets During the Evaluation Period: ...
  • Limited Control Over Capital and Payouts: ...
  • Lack of Regulatory Oversight: ...
  • High Leverage and Margin Requirements: ...
  • Financial Risk and Capital Exposure:
Feb 11, 2024

How do you get paid from prop firms? ›

Under the profit split model, the prop firm provides traders with a funded trading account in exchange for a share of their profits. The profit split typically ranges from 20-50%, and the trader is responsible for managing the trades and making profitable decisions.

Do prop firms give you real money to trade? ›

Prop firms, or proprietary trading firms, give traders access to simulated capital. In return, the traders agree to give the firm a percentage of their profits. Traders normally have access to various markets, including crypto, Forex, and even the news.

How are prop firm traders taxed? ›

Self-Employment Tax Implications:

In contrast, LLC prop traders don't have earned income reported on their Schedule K-1s, so they save SE tax but can't contribute to a retirement plan or deduct self-employed health-insurance premiums. Understanding the current rates and thresholds is crucial for accurate tax planning.

What payment methods does the funded trader use? ›

The Funded Trader offers a max profit split of up to 90/10. Once funded traders achieve profitability, they can request payouts in the form of cryptocurrencies or bank transfers via Deel.


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