The Dark Side of Prop Trading: Factors Leading to Financial Loss

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A few years ago, few people were familiar with prop trading, but it has gained popularity in recent years as an alternative to traditional PAMM accounts. With PAMM accounts, traders manage investors' funds but must first attract and convince these investors. In contrast, prop trading offers a more straightforward approach to fund management that initially appears more convenient. A trader pays a fee (up to $1,000) to enter a challenge, and if successful, can be granted up to $1 million in management funds. However, the reality is more complex. A study conducted in the United States revealed that many prop traders are dissatisfied with their experiences working with prop trading firms.


📍 The Performance Of Prop Traders: Results Of A 2023 Study

A study conducted in 2023 examined the performance of prop traders by surveying 10 randomly selected prop trading firms in the United States. Additionally, the study included responses from 3,000 traders who had experienced varying degrees of success in their trading endeavors. The data was sourced from the website of the CFTC regulator, statistics from an investigation into a complaint against the prop firm MyForexFunds, and publicly available information about another prop firm FTMO.


📍 General Analysis Results

The study revealed some striking insights regarding the performance of prop traders:

◾ Approximately 94% of traders fail to complete the challenges during the first or second phase, with only 6% successfully meeting the profitability and drawdown requirements.

◾ A significant 73% of traders who fail believe their outcomes are unjust, attributing their failures primarily to the prop firms rather than their own mistakes. Many contend that the firms manipulate results, undermining their chances of success.

◾ Of the small percentage 6% who do succeed in completing the challenge, an overwhelming 98% choose to sever their ties with the prop firms within the following six months.

The failure rates at both the first and second phases of the challenges are approximately equal. This suggests that the stricter conditions imposed during the second phase do not significantly influence the overall outcome. Instead, it indicates that the mistakes and challenges encountered are consistent across both phases.

Importantly, the survey revealed that inexperience is not a primary factor in the failure of the challenges. Over 80% of traders reported having prior trading experience, with many having actively traded on demo accounts for several months. These traders stated they understood the risks involved, were aware of their trading strategies, and had previously achieved positive results during their demo trading sessions.


📍 1. Reasons Cited By Prop Traders For Failing The Challenges

◾ Lack of Time (79%). Many traders feel pressured by high revenue targets set by prop firms, which often need to be achieved within a limited time period of just 1-2 months. Although, since 2023, almost all prop firms do not set such strict time limits.

◾ Technical Problems (61%). A significant number of traders reported encountering technical issues during the challenge process. Problems such as unreliable quotes, slow platform performance, and unexpected widening of spreads were commonly mentioned as major obstacles to their success.

◾ Violation of Risk Management (27%). A smaller but still notable proportion of traders admitted to breaching risk management rules. Common mistakes included engaging in high-risk gambling behavior, mismanaging leverage, and neglecting to set stop-loss orders.

Some traders reported that their lack of understanding of the prop company's terms and conditions led to unintentional rule violations. Specifically, many were unclear about the guidelines surrounding practices such as copying trades, trading during news releases, and the use of trading advisors. This confusion contributed to their unsuccessful attempts in the challenges, emphasizing the importance of clear communication and thorough understanding of the rules set by the prop firms.


📍 2. Most Frequent Complaints From Traders About Prop Firms

◾ Non-Market Prices (92%). A staggering majority of traders reported issues with prices that do not reflect real market conditions.

◾ Order Execution Failures and Canceled Profitable Orders (73%). Many traders experienced problems with their orders not being executed as expected, particularly when they were set to generate profits.

◾ Slippage (67%). A significant number of traders reported encountering slippage, where their orders were filled at prices different from those expected.

◾ Technical Problems with the Trading Platform (52%). Technical glitches and issues with the trading platform were cited as major frustrations by more than half of the traders surveyed.

◾ Ambiguous Contract Conditions (45%). Many traders found the terms outlined in their contracts to be unclear, leading to confusion and misunderstandings.

◾ Insufficient Support Service (19%). A smaller proportion of traders expressed dissatisfaction with the lack of adequate assistance from customer support.

◾ Kicking Out from the Market Due to Non-Market Gaps (11%). Some traders noted instances where they felt they were unfairly removed from trading positions due to non-market gaps.

◾ Other Complaints (7%). A few traders reported additional issues not covered by the aforementioned categories.


Traders often encounter hidden rules when working with prop firms, such as minimum holding periods for positions, strict limitations on the minimum length of stop-loss orders, and restrictions on the use of certain trading strategies.

Additionally, many traders express concerns about the lack of transparency in the operations of prop firms. On average, over 50,000 traders attempt to pass these firms' challenges each year, but only about 6%, or around 3,000 traders, succeed. Once qualified, these traders are offered between $100,000 and $1 million of the firm's capital, which is sometimes claimed to be sourced from investors. However, there is little clarity regarding how these prop firms can amass such significant investor capital to support 3,000 traders annually.


📍 3. Main Difficulties Encountered By Prop Traders During The Challenge Phases

◾ Sharp Spread Widening and Violation of Maximum/Daily Drawdown Level Requirements (44%)

◾ Automatic Position Closures and Stopping of Challenges by the Company Due to Drawdown Violations (34%)

◾ Other Reasons (51%)

It's important to note that traders could cite multiple reasons for their difficulties. The survey results indicate that many successful traders perceive prop firms as having a vested interest in creating obstacles to intentionally disadvantage traders.

◾ Difficulty of Challenge Conditions. 89% of traders described the challenge conditions as difficult, stating they were able to pass only due to their prior experience.

◾ Funding Amounts. 96% reported receiving an amount equivalent to their initial challenge deposit, typically ranging from $20,000 to $200,000. The anticipated funding of $1 to $2 million, as promised by the prop firm, is not accessible until at least one year of successful trading.

◾ Retention Rate. 98% of traders exited the program within six months.

In theory, prop firms claim to offer the same trading conditions on a live account as they do during the challenge phases. Additionally, these firms are transparent about their model; traders often operate on demo accounts, while analysts copy their trades. A significant number of traders cited emotional burnout as a primary reason for leaving the prop firms. The tough conditions, restrictions on instrument use, and the risk of having their agreements terminated due to breaches create considerable emotional pressure.

Once traders recover the costs associated with the challenge fees and their time, many choose to transition to independent trading, where they can set their own restrictions.


📍 CONCLUSION

Prop trading presents several problems that diminish its appeal for novice traders. Many beginners struggle to pass the challenges, while seasoned professionals prefer the freedom of individual trading, free from the constraints typically found in prop trading.


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