Prop firms have grown in popularity so much over the last few years that many traders are opting to go down the funding route, rather than opening an account with a forex broker.Both brokers and prop firms both provide huge amounts of opportunities for traders, allowing them to access the global financial markets and capitalize on the volatility of the forex market. But which is the right choice for you?
In this article, we’ll be comparing brokers and prop firms so you can decide which is the best route for you to go down. So, let’s get into it…
Broker Vs Prop Firms – Which Is Best For Traders?
Brokers have long been the chosen route for traders to access the markets and start trading. This was until around 2020 when the online prop firm industry exploded in popularity and traders started avoiding using brokers, moving solely to trading with prop firms. The reality is this can be a good or a bad decision, depending on your circ*mstances and the broker/prop firm you choose to work with.There is certainly a middle ground where most successful prop firm funded traders are also using brokers to trade. Likewise, many successful traders using brokerage accounts are now working with prop firms to increase their income from trading the markets.
Trading With A Forex Broker
Let’s start by looking at trading with a forex broker, as this is still where most traders start their trading journey…
Benefits –
There are a few large benefits of trading with a brokerage firm…
- Regulation – The main benefit of trading with a brokerage firm is regulation. Hundreds of brokers are regulated in their relevant jurisdictions. This means the brokers report to a governing body and cannot manipulate prices or cause harm to traders’ accounts. Your funds will also be safe in the event of a broker going bankrupt, and there is no chance of a regulator shutting down your broker.
- Reputation – Many brokers have been around for 10+ years, which is much longer than the online prop firm industry. This means that many brokers have hundreds of thousands of traders on their books, and it’s clear to see the brokers with a good reputation.
- No Rules – Brokers have no rules in terms of trading. This means you can have as much drawdown as your margin allows, risk as much as your margin allows, and trade whatever style (mostly) that you wish. This freedom can be very beneficial for traders to have.
- Great Pricing – Many brokers have the economy of scale benefit, meaning they can plug you directly into the market and get you the lowest spreads and low commissions. This is a massive benefit that you’ll find from trading with ECN/STP forex brokers.
Cons –
The main drawback of using a forex broker is the fact you’re trading your own capital. To make any sensible returns from trading, you’ll need a 6 figure account – minimum. You can either gamble your way to 6 figures (not recommended) or deposit a large sum of capital into your trading account.Most traders with only a few thousand dollars in their trading accounts cannot generate enough profits from trading to take this industry seriously when compared to their full-time jobs. This creates a barrier of entry, meaning many traders just cannot afford to trade with a broker.
Trading With A Prop Firm
Whilst there are benefits of trading with a broker, there are a huge number of benefits to consider when trading with a prop firm too.
Benefits –
Whether you like the idea of online prop firms or not, you cannot ignore the huge amount of benefits and opportunities they bring to traders…
- Low Entry Fee – Prop firm challenges typically cost anywhere from £100-£2000, depending on the prop firm and account size you’re looking at. This is much cheaper than the deposit required at a broker to make any serious profits.
- Large Trading Capital / High Profits – Prop firms allow traders to take huge amounts of capital without seeking investment or spending many years compounding their accounts. For example, we offer our funded traders up to £10,000,000 in funding – which is significantly more than average retail traders would ever be able to deposit into a brokerage account.
- Forced Into Becoming A Better Trader – Prop firms have risk management rules in place that force traders into becoming better and managing their risk, whether they want to or not. Some folks may see this as restrictive, but in reality, it makes you become a more consistent trader.
- Scaling Opportunities – Most prop firms allow traders to scale their capital. Take Lux Trading Firm for example. When our funded traders net 10% profit on their accounts, we double their trading capital up to £10,000,000 in funding. This would never be possible with a broker.
- No Accountability – With prop firms, you’re trading their capital, not your own capital. You are not responsible for losses and will not have to pay for losses out of your own pocket. If you were trading with a forex broker, every loss would be money out of your own pocket.
Cons –
There are still a few cons you need to consider if you’re thinking about prop firm trading…
- Lack Of Regulation – The prop firm industry (online) is not yet regulated. This means you’ll see prop firms popping up and going under constantly. This can be a risk to traders. However, this risk can be heavily mitigated by working with real capital prop firms.
- Demo Capital Prop Firms Going Bust – There are 2 types of prop firms. Demo/simulated prop firms or real capital prop firms. Demo prop firms never fund their traders with real money. Instead, they’re funding traders with fake capital and paying them based on their demo performance. These companies lose money on profitable traders and make money on unprofitable traders failing challenges – which sounds very much like a ponzi scheme. If no new traders are coming through the doors, the profitable traders cannot be paid.
However, real money prop firms like Lux Trading Firm work in the opposite fashion. Taking Lux Trading Firm as the example – we make money on profitable traders as we take a profit split. Profitable traders are given our real capital to trade with. We do not make money on traders failing trading challenges – only profitable traders taking profits out of the markets. This is exactly how ‘brick and mortar’ prop firms operate and when the regulators come knocking on the prop firm industry, it will only be real money prop firms that survive.
To mitigate this risk, work with a real money prop firm and avoid simulated capital prop firms.
In Conclusion – Should You Be Trading With A Broker Or A Prop Firm?
In summary, both prop firms and brokerages have their benefits and their drawbacks. Largely speaking, the best option is to use both to your advantage. The best thing you can do as a profitable trader is to work with a real money prop firm. When you withdraw your profits from the prop firms, deposit those profits into your brokerage account and continue to trade them.
This way, you have the safety of a regulated forex broker, whilst taking the massive withdrawals that prop firms can offer you. Being reliant on just forex brokers means you’re missing a huge amount of opportunity as a profitable trader.Being reliant on just prop firms means you’re unnecessarily increasing your risk in the markets.
If you’re looking to become a funded trader, work with Lux Trading Firm today!
