Are you still addicted to 80% of the profit share from PropFirms?
Trading with Prop Firms vs. Standard Accounts: A Closer Look at Hidden Costs and Probabilities
Forex traders are increasingly drawn to proprietary trading firms like FTMO, MFF, and True Forex Fund due to the allure of high potential profits. However, it's essential to approach these opportunities with caution to avoid becoming overly dependent on prop firms. In this article, we will explore a simple example to illustrate the potential downsides of trading with prop firms compared to standard accounts, considering profit shares, probabilities, and the challenge and verification processes.
The Example: Let's imagine a trader executes 8 trades, each generating a take profit level at $10 and a stop loss of $10 on gold. We will compare the outcomes of these trades under two scenarios:
Trading with a Prop Firm: Assuming a 200k swing account size and an entry fee of $1,300, the trader receives two chances to lose by 5%. Calculate the result with 1 unit and 4 lots for each trade (maximum 8 lots on gold due to margin level), which effectively halves the entry fee. When the take profit (tp) is hit: 4 lots * $1,000 (profit) * 8 (trades) * 0.8 (payout ratio) = $25,600 (final payout).
Trading with a Standard Account (100 USD account): Using a standard account, the same trading scenario would result in a profit of $100 * 200%^8 trades = $25,600. If we use the same initial capital as the entry fee of the prop firm ($1,300/2 = $650), the difference becomes very obvious: $650 * 200%^8 trades = $166,400.
Comparing Outcomes:
By comparing the potential profits, we can see that the trader would make significantly more profit by trading with a standard account using the same initial capital as the prop firm's entry fee ($166,400 vs. $25,600). However, the overall chance of a payout is significantly lower with the prop firm due to the challenge and verification processes. This means traders need to take on additional risk to pass the two steps required by the prop firm successfully.
Losing Potential Profit:
Although prop firms claim to provide an 80% profit share, in reality, if you have 8 winning trades, you are losing 84% of the potential profit to these prop firms, as calculated by the difference in profits between a prop firm and a standard account ($166,400 - $25,600) / $166,400 = 0.846 or 84.6%.
The Reality of Prop Firms:
Proprietary trading firms can be seen as a marketing platform for sellers, course providers, and company traders who seek certification. In this example, a trader pays $1,300 to receive a product worth less than $100. This doesn't even consider the probability of successfully passing the challenge and verification process required to trade with a prop firm.
Considering Probabilities:
Trading with prop firms adds a layer of complexity and uncertainty due to the challenge and verification processes. These hurdles can reduce the chances of receiving a payout, making it more difficult for traders to achieve consistent profits than trading with a standard account.
Conclusion:
While prop firms may offer unique opportunities, traders must be aware of the potential downsides, such as reduced profit shares, lower chances of receiving payouts, and a higher loss of potential profit. Traders should carefully weigh their options and make informed decisions based on their circumstances and goals, considering the probabilities and challenges of trading through prop firms.