--- title: "Prop firm challenges: how funded accounts work" description: "What a retail prop firm is and how a prop firm challenge works: the fee, the rules, the funded account, why most people fail and what regulators say." canonical: https://thetraderwiki.com/en/prop-firms/ lang: en kind: article published: 2026-09-30 updated: 2026-10-13 author: "Gabriel L." (https://thetraderwiki.com/en/authors/gabriel-l/) html: https://thetraderwiki.com/en/prop-firms/ json: https://thetraderwiki.com/en/prop-firms/index.json --- # Prop firms explained: the challenge, the funded account and the risks [Home](https://thetraderwiki.com/en/) › [Guides](https://thetraderwiki.com/en/learn/) › [Prop firms](https://thetraderwiki.com/en/prop-firms/) In the sense most people meet online, a prop firm is a company that sells you a paid trading test. You pay a fee to trade a simulated account. That account works like a [demo account](https://thetraderwiki.com/en/demo-accounts/) with pretend money. Hit a profit target without breaking the loss rules and the firm gives you a “funded account”, promising you a share of any profit you make on it. The test is usually called a prop firm challenge or an evaluation. This page explains how the challenge model works and where the firm’s income comes from. It compares a retail prop firm with a real proprietary trading firm and with a standard [CFD](https://thetraderwiki.com/en/glossary/#cfd) account. A CFD is a contract with a provider that pays or charges you the change in a price. You’ll also find what regulators have said, what happens when a firm closes and how introducing brokers and affiliates are paid. ## Key points - A prop firm challenge is a paid test on a simulated account. You pay a fee using real money, and that fee is the only money of yours involved. - Most outcomes depend on three rules: a profit target, a daily loss limit and a maximum [drawdown](https://thetraderwiki.com/en/glossary/#drawdown), the biggest drop the firm permits in your account. - A “funded account” is often still run as a simulation. According to Belgium’s regulator, the [FSMA](https://www.fsma.be/), the consumer “never makes any actual trades” and the firm alone decides what it copies to a real market ([warning, 7 March 2024](https://www.fsma.be/en/warnings/fsma-warns-consumers-against-shadow-investment-game)). - Most firms of this kind don’t hold an investment firm licence. No matter which regulator watches over [the company that opens your account](https://thetraderwiki.com/en/broker-groups-and-regulators/), the safeguards that come with a CFD account won’t cover your fee or any payout you’re owed. - Belgium’s regulator and Italy’s, [CONSOB](https://www.consob.it/), have published warnings about the model ([FSMA, 2024](https://www.fsma.be/en/warnings/fsma-warns-consumers-against-shadow-investment-game), [press release, 8 July 2024](https://www.consob.it/documents/1912911/3990887/cs_20240708.pdf/abe9873f-22b6-8a80-c1aa-0f3349665203)). - Introducing brokers and affiliates receive payment from the firm they send you to. Prop firm reviews and discount codes work the same way. ## What is a prop firm? Prop firm is short for proprietary trading firm. A prop firm used to mean one thing: a company that trades its own money in the markets and keeps the gains. At such a firm, the traders are staff or partners, and nobody pays to get in. The retail prop firm borrows the name. Often sold as a forex prop firm, it takes a fee from members of the public for a trading test. The firm says people who pass will trade the firm’s capital and keep most of the profit. The fee is small next to the account size in the advert, and that contrast is the sales pitch. Retail prop trading usually takes place on the same platforms as CFD providers, like MetaTrader 5, cTrader or TradeLocker ([trading platforms](https://thetraderwiki.com/en/trading-platforms/)). The prices appear identical, and the order tickets look the same. The difference lies in whose money is at risk and what rights you have by law. ## How does a prop firm challenge work? A prop firm challenge works in stages. The rules come from the firm’s own terms, and they differ from firm to firm. 1. **You pay the fee** You pick an account size and pay the evaluation fee. A larger simulated account costs more. That fee buys you one attempt. 2. **You trade a simulated account** The firm provides a login for a simulated account that holds a pretend balance. At this stage, none of your orders go to a real market. 3. **You chase the profit target** You pass a stage once your balance has grown by the firm’s target. Many firms have two stages. Some set a minimum number of trading days, and some set a time limit. 4. **You stay inside the loss rules** Two limits apply the whole time. The daily loss limit caps how far the account can fall in one day, and the maximum drawdown caps the total fall. Once you breach either one, the attempt is over. 5. **You fail, or you get a funded account** A failed attempt ends there. Starting again or using a “reset” costs another fee. If you pass, the firm opens a funded account with the same kind of loss rules. 6. **You ask for a payout** You and the firm split the profit from the funded account according to the share stated in the terms. The firm checks your trades against its rules before it pays out, and it can refuse a payout it says broke those rules. ## A prop firm challenge in numbers *Illustrative figures: a made-up example, not a forecast or a quote.* A made-up prop firm challenge shows how the numbers fit together. No figure here comes from a real firm. Say the fee is $500 for a simulated account of $100,000. *A made-up challenge on a simulated $100,000 account. Every figure is an example.* | Rule | Set at | What it means in money | | --- | ---: | --- | | Profit target | 10 % | The balance has to reach $110,000 | | Daily loss limit | 5 % | A fall of $5,000 in one day ends the attempt | | Maximum drawdown | 10 % | A balance below $90,000 at any time ends the attempt | | Profit split after passing | 80 % to you | On a $4,000 simulated profit, the firm would owe you $3,200 | In this example, the amount you can really lose is the $500 fee, plus the fee for each new attempt. Three failed attempts cost $1,500. The $100,000 was never yours to lose and never yours to withdraw. In this example, the target and the drawdown are equal, so you need to make 10 % before you lose 10 %. If you risk 1 % of the account per trade, ten losses in a row end the attempt. Risk 5 % a trade to get there faster and two losses do it, or a single bad day. ## How prop firms make money Fees are the first source of income for prop firms that run challenges. Each attempt generates a fee, and a failed one costs the firm almost nothing because the account was simulated. Resets, repeat attempts and add-ons bring in more money. Belgium’s [FSMA](https://www.fsma.be/) describes the tests as neither easy nor cheap. It says consumers often pay for several attempts, that some never pass, and that “this is how prop trading firms earn money from them” ([FSMA warning, 7 March 2024](https://www.fsma.be/en/warnings/fsma-warns-consumers-against-shadow-investment-game)). A firm that funds payouts from other customers’ fees has an incentive to keep failure rates high and payouts small. That creates a conflict of interest, close to what you see with a [market maker](https://thetraderwiki.com/en/glossary/#market-maker), a provider that takes the opposite side of your trade ([what are CFDs](https://thetraderwiki.com/en/what-are-cfds/)). Some firms say they copy their best traders’ orders to a real market and earn from that. From the outside, you can’t check the claim. ## Why most prop firm challenges fail Most challenges fail because of how the rules are built. No regulator publishes an audited pass rate for the industry. The firms’ own figures aren’t independently checked. Four things push the failure rate up. - The target is large next to the loss you’re allowed. You have to take big risks to hit it in a few weeks, and those big risks hit the drawdown limit first. - A single bad day is what the daily loss limit punishes. An attempt that was ahead overall can end after a normal run of three or four losing trades ([risk management](https://thetraderwiki.com/en/risk-management/#drawdown-ladder)). - The account is simulated, and the fee is small, so traders use far more [leverage](https://thetraderwiki.com/en/leverage-and-margin/) than they would with their own money. Leverage is the multiple between the size of a trade and the money behind it. - Most retail traders lose on real accounts too. [ESMA](https://www.esma.europa.eu/) reported what national regulators found: between 74 % and 89 % of retail CFD accounts lost money ([press release, 27 March 2018](https://www.esma.europa.eu/press-news/esma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors)). A test demanding a quick, big gain is tougher than simply not losing. Failures also come from the small print. A firm’s terms can ban trading around news, holding trades over the weekend, certain automated strategies or copying trades between accounts. Breaking one of these rules can cancel a pass or a payout after the event. ## Prop firm, proprietary trading firm and CFD account compared Whose money is at risk, and who is protected, is where a retail prop firm, a real proprietary trading firm and a CFD account part ways. *How a retail prop firm challenge differs from a traditional proprietary trading firm and from a retail CFD account.* | Question | Retail prop firm | Traditional proprietary trading firm | Retail CFD account | | --- | --- | --- | --- | | Who pays whom to start? | You pay the firm a fee | The firm pays you, as staff or a partner | You deposit your own money | | Whose money is traded? | Often nobody’s: the account is simulated | The firm’s own capital, in real markets | Yours, against the provider | | What can you lose? | The fees you paid | Your job or your stake | Up to everything in the account | | What do you keep? | A share of profit, if the firm approves the payout | Pay and a bonus | All of the profit, after costs | | Is the firm licensed? | Usually not as an investment firm | Depends on the country and what it trades | Yes, by the regulator of the company that opens your account | | Who can you complain to? | Usually only the firm | An employer, under employment law | The provider, then the ombudsman or regulator that covers its company, where one exists | A CFD account has rules a challenge doesn’t, and these are set by the regulator of the company that opens it. At a company regulated in the EU, the UK or Australia, one of those rules is [negative balance protection](https://thetraderwiki.com/en/glossary/#negative-balance-protection), which stops you losing more than you put in. A second rule there keeps client money apart from the firm’s own. Those rules protect a deposit. A challenge fee is a payment for a service, so nothing protects it in the same way. ## Are prop firms regulated? Financial regulation mostly doesn’t reach prop firms that only sell simulated challenges. The Czech National Bank’s published view is that simulated trading with pretend money, where no order is really carried out or settled, isn’t an investment service. The bank’s view also says such trading needs no licence. The opinion doesn’t cover business models where simulated trading is part of a regulated service ([CNB opinion, 28 September 2023](https://www.cnb.cz/cs/dohled-financni-trh/legislativni-zakladna/stanoviska-k-regulaci-financniho-trhu/RS2023-18)). On 7 March 2024 Belgium’s regulator cautioned consumers about the model, calling it a game of shadow investment. The regulator said the firms lack authorisation, so they can’t provide investment services. It added that a consumer finds it hard to tell whether any payout is due ([FSMA warning](https://www.fsma.be/en/warnings/fsma-warns-consumers-against-shadow-investment-game)). Italy’s CONSOB followed on 8 July 2024, likening the offers to trading “video games”. Complaints it had received said the tests were built to make people try again and that promised profits weren’t shared. It added that Spain’s regulator had issued a similar warning ([CONSOB press release](https://www.consob.it/documents/1912911/3990887/cs_20240708.pdf/abe9873f-22b6-8a80-c1aa-0f3349665203)). On 1 September 2023 the United States [CFTC](https://www.cftc.gov/) announced that it had sued a firm trading as My Forex Funds. The complaint alleged that more than 135,000 customers had paid at least $310 million in fees ([CFTC release 8771-23](https://www.cftc.gov/PressRoom/PressReleases/8771-23)). It also alleged that the firm itself was the [counterparty](https://thetraderwiki.com/en/glossary/#counterparty), the other side, to almost all customer trades. Those allegations were never tested at trial. The court threw the case out on 13 May 2025, with the complaint dismissed with prejudice, meaning it can’t be filed again ([court order](https://www.govinfo.gov/content/pkg/USCOURTS-njd-1_23-cv-11808/pdf/USCOURTS-njd-1_23-cv-11808-3.pdf)). A special master had found the CFTC made false statements to the court about transfers that were really tax payments, and that the CFTC acted wilfully and in bad faith ([report of 30 April 2025](https://www.cftc.gov/media/12106/ogc_KazmiReportRecommendationSactions051325/download)). The order does not address whether the business model was lawful. ESMA, the [FCA](https://www.fca.org.uk/) and [ASIC](https://asic.gov.au/) have issued no statement aimed directly at prop firm challenges. A regulator that has said nothing about a firm hasn’t approved it. You can look a firm up yourself ([how to verify a licence](https://thetraderwiki.com/en/is-forex-and-cfd-trading-safe/#check-a-regulated-broker)). ## What happens when a prop firm closes When a prop firm closes, your challenge, your funded account and any unpaid payout go with it. The clearest record is the My Forex Funds case. On 29 August 2023 a US court froze the firm’s assets and appointed a temporary receiver ([CFTC release 8771-23](https://www.cftc.gov/PressRoom/PressReleases/8771-23)). Ontario’s securities regulator issued a temporary order against trading the same day ([CFTC release 8771-23](https://www.cftc.gov/PressRoom/PressReleases/8771-23)). Customers’ accounts stopped without warning, whatever stage they were at. A second vulnerability is access to the trading platform. A prop firm rents its software, often through another company’s licence. If the software maker or that company cuts the firm off, every account goes dark at once. When a firm closes, you’re in the position of someone an unregulated company owes money to. Nothing pays back a challenge fee or an unpaid profit split, because the firm never held money for you as an investment customer. ## A funded account isn’t your money, and the fee isn’t protected > **Risk warning.** A funded account provides a login along with a promise. The balance on the screen is the firm’s number, often a simulated one. Any payout is a contract claim against a company that usually holds no licence. Italy’s regulator warns these offers can lead to the loss of the money you commit ([CONSOB, 8 July 2024](https://www.consob.it/documents/1912911/3990887/cs_20240708.pdf/abe9873f-22b6-8a80-c1aa-0f3349665203)). Passing a challenge also says little about trading your own money, for the same reasons a demo flatters results ([is trading safe](https://thetraderwiki.com/en/is-forex-and-cfd-trading-safe/)). ## Introducing brokers and affiliates Introducing brokers and affiliates bring customers to brokers and prop firms. The firm that gets the customer pays them for doing that. ### What is an introducing broker? An introducing broker, or IB, brings customers to a broker and leaves the money and the trades to that broker. In the United States the term carries a legal meaning. A US IB solicits or accepts orders without taking customers’ money, and it has to register and join the NFA, the industry’s self-regulatory body, unless an exemption applies ([NFA](https://www.nfa.futures.org/registration-membership/who-has-to-register/ib.html)). Elsewhere, in forex and CFD marketing, “IB” is used loosely for anyone who gets a share of the [spread](https://thetraderwiki.com/en/glossary/#spread) or commission from the customers they send. The spread is the gap between the buy and sell price. ### What is a forex affiliate? A forex affiliate is any website, channel or person who earns money each time someone signs up via their link. A forex affiliate program may pay a flat amount per new depositor, or it may pay a share of what that customer later pays. Prop firms run the same programs, usually tied to a discount code. “Forex partnership” offers and “refer a friend” offers are versions of the same deal. ### The conflict of interest The conflict is that whoever recommends a broker or a prop firm to you may earn more when you sign up, deposit more or trade more. None of those actions means you are doing well. The FCA has flagged CFD firms that “use and pay unauthorised affiliates” to introduce clients, giving social media influencers as examples ([FCA, CFD firms page](https://www.fca.org.uk/firms/contract-for-differences)). In June 2025 ASIC sent warning notices to 18 finfluencers and said some pose as trading experts to promote CFDs ([ASIC, 12 June 2025](https://www.asic.gov.au/about-asic/news-centre/news-items/asic-cracks-down-on-unlawful-finfluencers-in-global-push-against-misconduct/)). TheTraderWiki takes no affiliate payments and doesn’t rank providers ([compare brokers](https://thetraderwiki.com/en/compare-brokers/)). ## Best prop firm or cheapest prop firm: what to check No “best prop firm” list is neutral, as the sites publishing them are mostly paid through affiliate links. The cheapest prop firm isn’t the safest either, because a low fee tells you nothing about whether payouts arrive. You can check the facts below without relying on any ranking. - Which legal company you would be paying, where that company is registered and whether any financial regulator lists it ([choosing a provider](https://thetraderwiki.com/en/choosing-a-provider/#licence-verification)). - Who decides if a trade is copied to a real market and whether the terms say the funded account is simulated. - How the drawdown is measured: from the starting balance, or trailing up behind your highest balance. - Whether the firm can change the rules once you’ve paid, and every rule that can cancel a payout. - If the firm loses its platform or shuts, what the terms say happens to your account and any unpaid profit. - Who is recommending the firm to you, and whether they’re paid for it. ## Common questions about prop firms Most questions about prop firms are about whose money gets traded, what it costs and who offers you protection. ### What is a funded account? A funded account is the account a prop firm gives you after you pass its challenge. The firm says it carries the firm’s capital and pays you a share of the profit. At many firms it’s still a simulated account, and the firm decides whether to copy any of your trades to a real market. You can’t withdraw the balance, only the profit share the firm approves. ### Can you lose money with a prop firm? You can lose every fee you pay to a prop firm. Each failed challenge costs the fee and a new attempt costs another fee. You can also lose a payout you’d earned if the firm refuses it, closes or loses its platform. But you can’t lose more than the fees, because the account balance was never your money. ### Are prop firms legal? Prop firms that sell simulated challenges can operate legally in many countries, but most don’t hold a licence as an investment firm. The Czech central bank says purely simulated trading isn’t an investment service ([CNB opinion, 28 September 2023](https://www.cnb.cz/cs/dohled-financni-trh/legislativni-zakladna/stanoviska-k-regulaci-financniho-trhu/RS2023-18)). Legal doesn’t mean supervised. Regulators in Belgium and Italy have warned the public about the model. ### Why do some prop firm challenges cost only a few dollars? A very cheap prop firm challenge works as an advert for the pricier options. Few people pass because the account is small or the rules are tight. The firm offers those who fail a reset or a bigger challenge. What you’d spend across all your attempts matters more than the price of one. ### What is a prop firm competition or demo contest? A prop firm competition is a contest held on simulated accounts, where the top performers win a prize, often a free challenge. A forex demo contest run by a broker operates in the same way. Both types of contest reward the largest gain over a short period, so the winners are usually those who took the most risk. Taking the most risk is the opposite of what sustains a real account. ### What does it mean to become an introducing broker? To become an introducing broker means signing an agreement to send customers to a broker for pay. In the United States, unless an exemption applies, that needs registration and membership of the NFA, the industry’s self-regulatory body ([NFA](https://www.nfa.futures.org/registration-membership/who-has-to-register/ib.html)). In other countries it may need a licence too, depending on what you say and do for clients. The pay depends on how much the people you introduce deposit or trade. ## Sources The original documents this page cites, in the order they first appear. 1. [Financial Services and Markets Authority](https://www.fsma.be/), FSMA 2. [The FSMA warns consumers against shadow investment game](https://www.fsma.be/en/warnings/fsma-warns-consumers-against-shadow-investment-game), FSMA, 2024-03-07 3. [Commissione Nazionale per le Società e la Borsa](https://www.consob.it/), CONSOB 4. [Comunicato stampa: Attenzione ai “videogiochi” di trading on line. Consob segnala in un’Avvertenza i rischi connessi con i test di abilità](https://www.consob.it/documents/1912911/3990887/cs_20240708.pdf/abe9873f-22b6-8a80-c1aa-0f3349665203), CONSOB, 2024-07-08 5. [European Securities and Markets Authority](https://www.esma.europa.eu/), ESMA 6. [ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors](https://www.esma.europa.eu/press-news/esma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors), ESMA, 2018-03-27 7. [K simulovanému obchodování na demo účtu (RS2023-18)](https://www.cnb.cz/cs/dohled-financni-trh/legislativni-zakladna/stanoviska-k-regulaci-financniho-trhu/RS2023-18), Česká národní banka, 2023-09-28 8. [Commodity Futures Trading Commission](https://www.cftc.gov/), CFTC 9. [CFTC Charges “My Forex Funds” with Fraudulently Taking Over $300 Million From Customers Hoping to Become Professional Traders (Release 8771-23)](https://www.cftc.gov/PressRoom/PressReleases/8771-23), CFTC, 2023-09-01 10. [CFTC v. Traders Global Group Inc. et al., Case No. 23-cv-11808, Order adopting the Report and Recommendation and dismissing the complaint with prejudice (ECF No. 260)](https://www.govinfo.gov/content/pkg/USCOURTS-njd-1_23-cv-11808/pdf/USCOURTS-njd-1_23-cv-11808-3.pdf), U.S. District Court for the District of New Jersey, via govinfo.gov, 2025-05-13 11. [CFTC v. Traders Global Group Inc. et al., Report and Recommendation of the Special Master on the motion for sanctions (ECF No. 258)](https://www.cftc.gov/media/12106/ogc_KazmiReportRecommendationSactions051325/download), CFTC, 2025-04-30 12. [Financial Conduct Authority](https://www.fca.org.uk/), FCA 13. [Australian Securities and Investments Commission](https://asic.gov.au/), ASIC 14. [Introducing Broker (IB) Registration](https://www.nfa.futures.org/registration-membership/who-has-to-register/ib.html), National Futures Association 15. [Contract for differences](https://www.fca.org.uk/firms/contract-for-differences), FCA, 2025-06-13 16. [ASIC cracks down on unlawful finfluencers in global push against misconduct](https://www.asic.gov.au/about-asic/news-centre/news-items/asic-cracks-down-on-unlawful-finfluencers-in-global-push-against-misconduct/), ASIC, 2025-06-12 ## Related pages - [Is forex and CFD trading safe, legal or a scam?](https://thetraderwiki.com/en/is-forex-and-cfd-trading-safe/): Legal in most countries, risky everywhere: how to tell a real product from a fraud, country by country. - [Risk management in trading: position size and stops](https://thetraderwiki.com/en/risk-management/): Risk per trade, sizing from your stop, the recovery table, stop types and the habits that empty accounts. - [Choosing a forex broker or CFD broker without a ranking](https://thetraderwiki.com/en/choosing-a-provider/): Licence checks, how your money is protected, all-in costs, execution, withdrawals and red flags. - [Demo trading account: what it teaches and what it hides](https://thetraderwiki.com/en/demo-accounts/): What a demo copies and leaves out, how to set one up like a real account, a practice plan, and when to stop. --- CFDs are complex, leveraged products, and the regulators’ own figures show that most retail accounts lose money. Nothing on TheTraderWiki is investment advice. Read the full [risk disclosure](https://thetraderwiki.com/en/risk-disclosure/), and if you’re unsure, talk to a qualified adviser. Broker details can change and they can be wrong. Before you open an account, confirm them with the broker and the regulator’s register.