What Is a Prop Firm? How It Works and the Basic Rules
A prop firm is a setup where you pay an evaluation fee to take a test, and if you pass, you receive a share of the profits. Most of these accounts, however, are demo or simulated accounts. This article walks through the basics only, following the items PROP CHECK uses when comparing each firm's rules.
A prop firm gives traders who pass its evaluation an account to trade
The term proprietary trading originally referred to financial institutions trading with their own money rather than their clients' funds. The prop firms advertised to individual traders today are what I see as “services that sell evaluation programs.”
From challenge to profit split
First, you pay the evaluation fee and receive a challenge account. During the evaluation, you trade within the rules set by the firm and aim to reach the profit target. Once you pass, you move to a funded account, request withdrawals on the profits made there, and receive a set percentage.
1STEP, 2STEP, 3STEP, INSTANT, and Pay-after (pay after passing)
PROP CHECK groups plans by the number of evaluation stages and by when the evaluation fee is paid. Pay-after (pay after passing) is the type defined by that payment timing. Firms call their plans all sorts of names, but most fit one of the following.
| Type | Evaluation process | Typical tendencies | Suited to |
|---|---|---|---|
| 1STEP | Pass after a single evaluation | Finishes quickly, but DD is often tighter and calculated more strictly | Traders used to managing rules |
| 2STEP | Clear two stages in order | Takes longer, but DD has more room and fixed DD is common | Beginners who want to try it calmly |
| 3STEP | Clear three stages in order | Lower target at each stage, and fees tend to be lower too | Those who want to start small and go step by step |
| INSTANT (instant funding) | Start in a funded account with no evaluation | Tends to have higher fees, tighter DD, and detailed withdrawal conditions | Experienced traders who want to skip the evaluation |
| Pay-after (pay after passing) | Part of the evaluation fee is paid on passing | Lighter payment up front, but you need to include the fee due on passing in the total when comparing | Those who want to keep up-front costs low |
For my first attempt, I would pick a smaller 2STEP or 3STEP account, since their rules are relatively looser than other plans. Rather than passing quickly, you get a cheap feel for trading within the rules and can get used to it safely.
Quick reference for common rule items
Here are the items used in PROP CHECK's firm comparisons, summarized for beginners. The figures are ranges seen on a third-party comparison site (16 programs, $100K accounts) and are not the terms of any particular firm.
| Item | In short | Range commonly seen (reference) |
|---|---|---|
| Fee (listed price) | The fee to take the evaluation | About $280–580 for a $100K account |
| Profit target (evaluation) | Profit needed to pass | About 6–10%. About 4–6% in the second stage |
| Max DD & calculation method | Loss limit for the whole account | About 3–10%. Difficulty depends on whether it is fixed or trailing |
| Daily DD & calculation method | Loss limit for one day | None to about 5% |
| Minimum profitable days | Required number of days with profit above a set amount | None to a few days |
| Consistency rule | Cap on how much of total profit one day can account for | About 35–55% where it applies |
| Profit split | Share of profit you receive | Usually about 80%, and some plans let you raise it for an extra fee |
| Withdrawal request interval | How often you can request a withdrawal | Anytime to about every 14 days |
| Withdrawal maximum & minimum | Upper and lower limits per withdrawal | Varies widely by plan |
| Fee refund (after passing) | Whether the evaluation fee is returned | Varies: refunded with the first withdrawal, no refund, etc. |
| Profit target after passing | Additional target in the funded account | Often none, but some types have one |
| Max lot & leverage | Limits on trade size and leverage | Set differently by plan and instrument |
| EA/automated trading & copy trading | Whether automated trading or copying from other accounts is allowed | Ranges from allowed with conditions to prohibited |
| VPS restrictions & IP rules | Restrictions on trading environment and connection source | Shared environments and the same IP often come with conditions |
From here, we will go through the items beginners should understand first, one by one.
Max DD is the real limit on how much you can lose
The first thing to look at is max DD, not account size. Max DD sets the upper limit on how much money you can actually lose in that account.
| Example | Account size | Max DD | Amount you can actually lose |
|---|---|---|---|
| A | $200,000 | 4% | $8,000 |
| B | $100,000 | 10% | $10,000 |
| C | $50,000 | 10% | $5,000 |
*Figures are illustrative examples, not the terms of any particular firm.
A's account is twice the size of B's, yet B lets you lose $2,000 more. A bigger account looks like an advantage, but what decides your room to trade is the max DD amount. When comparing plans, re-sorting them by the dollar amount of account size × max DD changes the picture.
The ratio of profit target to max DD = difficulty of passing
The profit target is the profit needed to pass the evaluation, set as a percentage of the account. The target figure alone does not tell you how easy a plan is to pass. Looking at how large the profit target is relative to max DD makes difficulty easier to compare.
| Example | Profit target | Max DD | Profit target ÷ max DD | Difficulty (rough guide) |
|---|---|---|---|---|
| A | 8% | 10% | 0.8 | Easier |
| B | 10% | 10% | 1.0 | Normal |
| C | 10% | 6% | About 1.67 | Harder |
| D | 6% | 3% | 2.0 | Hard |
*Figures are illustrative examples. The smaller the ratio, the less you need to earn relative to the room you have to lose.
D has the lowest target at 6%, but by ratio it is the strictest. Choosing on a low target alone can actually lead you to a plan that is harder to pass.
Going one step further, you can set your per-trade risk from the DD and think of the profit target as a multiple of that risk. Here is the calculation I use, using a $100K account as an example.
| Item (example: $100K account) | 1STEP | 2STEP |
|---|---|---|
| [Example] Daily DD / max DD | 3% / 6% | 5% / 10% |
| Risk per trade | 0.30% ($300) | 0.50% ($500) |
| Allowed daily losses (daily DD ÷ risk per trade) | 10.0 | 10.0 |
| Allowed total losses (max DD ÷ risk per trade) | 20.0 | 20.0 |
| Profit target | 10% | 13% (8% + 5% combined) |
| Profit needed | $10,000 | $13,000 |
| Required win multiple (profit needed ÷ risk per trade) | 33.3 | 26.0 |
| Target days | 10 days | 10 days |
| Daily target multiple (required win multiple ÷ target days) | 3.33 | 2.60 |
*All figures are illustrative examples, not the terms of any particular firm. For 2STEP, the profit targets of both stages are added together.
In both cases, the risk is set so you can withstand 10 losses in a day and 20 overall. Compared on that basis, in this example 2STEP needs a smaller win multiple and is more likely to be passed quickly. Even with a higher target percentage, 2STEP gets easier because you can take more risk per trade.
The calculation method makes a big difference to max DD difficulty
Max DD (maximum drawdown) is the floor: drop below this line even once and you fail. Even with the same 8% figure, difficulty varies a lot depending on how it is calculated.
With fixed (static) DD on the left, the floor measured from the starting balance never moves. With trailing DD on the right, the floor rises along with the highest balance. The price action is the same, but on the right, simply giving back profit you had built up was enough to fail.
Trailing DD splits further into two types depending on when the floor is raised: the EOD type, which trails the end-of-day balance, and the HWM (high-water mark) type, which trails the intraday peak including floating profit.
| Type | When the floor rises | Example: that day's movement | Floor at end of day (example) | Difficulty |
|---|---|---|---|---|
| Fixed (static) DD | Never | Floating profit reaches +$2,000, closed at +$500 | Stays at $97,000 (room: $3,500) | Normal |
| Trailing (EOD, end-of-day balance) | When the end-of-day balance sets a new high | Same as above | $97,500 (room: $3,000) | Hard |
| Trailing (HWM, peak floating profit) | When floating profit during trading sets a new high | Same as above | $99,000 (room: $1,500) | Hardest |
*Example: $100K starting balance with a $3,000 max DD. Figures are illustrative examples.
With the HWM type, the floor rises even if floating profit appears and is then given back. Most trailing types stop once the floor has risen to the level of the starting balance. When reading a rule table, it is worth reading all the way to the "Max DD & calculation method" column.
Daily DD is a loss limit reset every day
Daily DD is the most you are allowed to lose in a day, and it is recalculated each day from that day's starting point.
In this example, there is still room before max DD. The daily DD line, though, is measured from that day's starting balance, so it sits much higher. To take an extreme case, you can be up on the account overall and still fail because of a single day's loss.
If it were me, I would also check whether the starting point is the previous day's closing balance or equity including floating P&L. The reset time in server time also differs from firm to firm.
Minimum profitable days and consistency rules are conditions on how you earn
Minimum profitable days is a condition on how many days you need with profit above a set amount. Some plans simply count the days you traded, regardless of profit.
The consistency rule sets the maximum percentage of total profit that a single day's profit can account for. It is meant to discourage trading that reaches a pass or a withdrawal on one big win.
Take a 50% cap. In the left example, the biggest day is $600 out of $2,000 total, or 30%, so the condition is met. In the right example, the biggest day is $1,500 out of $2,300 total, about 65%, so the condition is not met.
To meet the condition in the right example, total profit needs to build up to $3,000 or more. You keep adding profit on other days until $1,500 is 50% or less of the total. Whether this rule is checked during the evaluation or at withdrawal depends on the plan.
The profit split sets the share you receive
The profit split is the share of profit made in the funded account that the trader receives.
In the example shown, the profit is $1,000 and the split is 80%, so you receive $800. Many plans have a split of around 80%, and some let you raise it to 90% or more for an extra fee.
Rules on max lot, leverage, EAs, copy trading, VPS, and IP
Max lot and leverage are the limits on how much you can trade at once and at what leverage. Even for the same account size, the settings vary by firm and instrument.
EA/automated trading and copy trading are often allowed with conditions. Besides whether you can use them, you need to read how far you can use them. VPS restrictions and IP rules exist to check that you are not trading in the same environment as someone else. If family members share the same connection, or you trade from several locations, please check the terms before signing up.
There are also special rules, such as restrictions on news trading and weekend holding, and bans on very short-term trading. They often lead to failure or cancelled profits, so the next article covers them together.
A firm's income comes mainly from evaluation fees
Most firms do not route traders' trades to the actual market or hedge them. They do not even have a trading setup that would allow it. In that case, the firm's profit is what remains of challenge sales after subtracting the amount paid out in withdrawals.
Under this model, the more withdrawals there are, the less money the firm has on hand. That is why it matters how much financial strength a firm has and whether it shows signs of being prone to collapse.
PROP CHECK's guides to four featured firms look into each firm in depth, including these points. The firms covered are RZR Funded, whose operations are backed by a major broker; Propr, which publishes its revenue, payouts, and reserves on a dashboard; and FundedHive and Hypernova, which use smart contracts. If one of them interests you, start with the guides to four featured firms.
Don't spend your whole budget on the first attempt
A prop firm lets you experience trading a large account for a small fee. On the other hand, most accounts are simulated, and there are conditions between passing and withdrawing. It is more realistic to treat the evaluation fee as money you will not get back.
I recommend splitting your budget into two or three attempts so you don't use it all on the first one. Before signing up, always write down at least these items from the quick reference: the calculation methods for max DD and daily DD, and the withdrawal request interval. Also decide for yourself that you will stop trading for the day once you have lost about half of the daily DD.
Special rules, rule changes, conditions buried deep in the terms, and the risk of firms that cannot keep operating will be covered in the next article.
PROP CHECK includes referral links to some prop firms, and the operator may receive a commission if you sign up. Referral commissions are not included in the score calculation.
Sources
FX Handbook, "Prop Firm Rules Compared: Drawdown, Targets, Fees and Payouts" (updated November 2, 2026) https://fxhandbook.com/prop-firms/rules
Investopedia, "Proprietary Trading: What It Is, How It Works, and Benefits" https://www.investopedia.com/terms/p/proprietarytrading.asp
Rule item names and plan types: items used in PROP CHECK (propchecklab.com) firm comparisons
Checked: 2026-11-11