The model in one paragraph
A prop firm (proprietary trading firm) sells access to trading capital. You pay a one-time evaluation fee, trade a demo-like challenge account under fixed rules — a profit target, a maximum daily loss and a maximum total loss — and, if you pass, receive a funded account. Profits on that account are split, typically 80/20 in your favour. Lose more than the rules allow and the account is closed; you can buy a new challenge and try again. The firm earns from failed challenges and from its share of successful traders.
How a challenge works, using FTMO as the benchmark
FTMO is the largest and longest-running retail prop firm, founded 2015 in Prague, and the reference point in our FTMO review. Its structure is representative:
| Element | FTMO 2-Step | FTMO 1-Step |
|---|---|---|
| Phase 1 profit target | 10 % | 10 % |
| Phase 2 profit target | 5 % | — |
| Max daily loss | 5 % of starting capital | 3 % |
| Max total loss | 10 %, static | 10 %, trailing |
| Account sizes | 10,000 – 200,000 USD | 10,000 – 200,000 USD |
| Fee | 89 – 1,080 EUR, refunded with first payout | same range |
| Profit split | 80 %, up to 90 % after scaling | 80 %, up to 90 % |
| Scaling | +25 % capital every 4 months at ≥ 10 % profit, up to 2 million USD | same |
| Payouts | bi-weekly, average processing 8 hours | same |
Three rules decide everything:
Maximum daily loss is measured from the day’s starting balance or equity, including open positions. An EA holding a basket of five trades that goes 5 % underwater intraday breaches the rule even if the trades later close in profit.
Maximum total loss is either static (measured from the initial balance) or trailing (measured from the highest equity reached). Trailing drawdown is far harder for grid and averaging strategies.
Profit target must be reached without violating the first two. Time limits have largely disappeared; consistency rules — no single day may account for more than a set share of total profit — have replaced them at several firms.
What it costs, really
The sticker price is the challenge fee. The real cost is the pass rate. Industry-wide, most challenges fail, and most traders buy more than one. A 100,000 USD FTMO challenge at 540 EUR that you pass on the third attempt has cost 1,620 EUR before the first payout, of which one fee comes back. Set a budget for attempts, not for one challenge.
Prop firms for algo traders: the specifics
For EA traders the prop-firm model is attractive because capital, not strategy, is usually the bottleneck. A robot that makes 3 % a month at 6 % max drawdown earns 300 USD on a 10,000 USD personal account and 2,400 USD (80 % of 3,000) on a funded 100,000 USD account. Four things change compared with running the same EA at a broker:
- Daily-loss rules cap your lot size far below what the EA’s own risk setting suggests. Our challenge guide has the sizing formula.
- Grid and martingale EAs are structurally at odds with trailing drawdown. Trend and breakout EAs with a fixed stop-loss fit.
- News restrictions apply on some account types; an EA needs a working news filter. See news filters for EAs.
- Latency still matters, because the firm’s server is usually in the same Equinix data centres as brokers’. Run the terminal on a VPS in NY4 or LD4.
Which firms allow EAs and under what conditions is in our prop-firm comparison for algo traders.
When a prop firm is the wrong tool
If your EA has no verified live track record of at least six months on a real account, you are paying challenge fees to find out whether it works — an expensive test bench. Prove the EA on a small live account at an EA-friendly ECN broker first, measure the live drawdown with a portfolio tracker, and only then buy a challenge sized so that the measured drawdown sits comfortably inside the firm’s limits.