How Do Profit Sharing Arrangements Work?

Trading in the foreign exchange (Forex) market is no easy feat. In order to be successful, most people need a lot of experience and capital behind them, so they can read the markets and act promptly and confidently to make the most of currency fluctuations.

However, neither experience or capital are easy to come by, particularly for those who are just starting out in the industry. That is why lots of people who are considering trading professionally use proprietary – or prop – firms.

¿Qué son las empresas de atrezzo?

Prop firms help Forex traders, both amateur and experienced, with their trading experience.

They do this by trading on behalf of clients, providing a lot more money than the trader would otherwise be able to get their hands on.

Prop firms can even offer leverage of 1:100 for experienced traders, which means clients can gain access to 100 times the amount of money they put in, which will enable them to hold much larger positions in the currency they have chosen.

When the trade comes off successfully, the prop firm gains from the profits, giving the client a split of the returns.

At the same time, as prop firms own the trades, they are accountable for any losses the client experiences. Therefore, traders do not incur any financial deficits themselves even if they lose money on the market.

What are the benefits of using prop firms?

The main reason why many traders choose to use a prop firm instead of entering the markets on their own is because they can access a significant amount of capital, often up to $2,000,000 (£1,590,000) to trade with by doing it this way.

This is likely to be substantially more than they would be able to trade with alone, particularly when just starting out.

As they do not incur personal financial losses, even those who have a large amount of equity often use prop firms as it provides more security. Even if they make an error of judgement with their trade, by either entering or exiting at the wrong time, they will not lose any of their own capital, which means their assets remain protected.

Another reason why many traders choose to work with prop firms is they can access a lot of resources by doing so. For instance, they can use clever trading tools, such as ones that provide in-depth data analysis and offer predictions about future market activity.

By analysing the data at speed, they can help traders determine what action to take much more quickly than they would without these programs. This gives them a competitive edge against other traders who are not using them.

Additionally, before traders gain access to the prop firm’s money, they typically have to pass an evaluation process. This ascertains whether they have the skills to become a successful trader.

This one-step evaluation assessment provides them with a dummy account, and their aim is to meet a ten per cent profit target. Once they can prove they are able to make money on the market, they will qualify for the funding to open a real account.

Although this process can last several weeks, depending on how long it takes for the trader to hit the target, during this time they can gain experience that will serve them well in the future when they are working with real money.

What’s more, they can often access training and resources from the prop firm to help them improve their skills as a trader, so they are more likely to gain profits with their trade in the future than if they worked solo.

How do prop firms split the profits?

Of course, traders want to make sure that working with a prop firm is still profitable for them, even with the added security of not losing any assets if they make a loss on a trade.

This is why it is important they check the profit split before signing up to a prop company.

The split from the profits that have accrued from successful trades varies between prop firms, and sometimes depends on the level of experience the trader has.

Some prop firms have a fixed percentage of profits, while a few offer a tiered system, which means traders who have gained particular achievements are able to enjoy a better split proportion and earn more of the profit.

The reason why prop firms might adopt the tiered system is it encourages traders to perform better, as they personally gain by getting a bigger percentage split if they hit certain milestones.

An example of a typical payout ratio is 80 per cent, which means the trader retains 80 per cent of the profit share.

Therefore, if they used $250,000 from the prop firm and they ended up with $300,000 from their trade, they will earn four-fifths of the $50,000 profit, which is $40,000. The prop firm will, on the other hand, gain $10,000.

Some prop firms allow clients to buy an ‘add on’ when they sign up, which means they can earn a higher share of their profit up to 90 per cent. So, in the previous example, the trader would have earned $45,000 and the prop firm would have walked away with $5,000.

This is not the only ‘add on’ that might be available. For instance, some prop firms allow clients to pay extra to activate an additional level of scaling, which may be significantly more than the lower one and may substantially increase their funding.

Alternatively, they could purchase an ‘add on’ that allows them to trade without any stop loss restrictions.

Usually, traders need to place a stop loss within one minute on all trades, which means they automatically exit if the currency dips to a certain level. The aim of this is to avoid losing money by getting out before it is too late.

However, if a trader opts out of a stop loss by buying this particular ‘add on’, they are at liberty to risk their trade and are not restricted by a percentage of loss.

What can affect profits?

As well as the profit margins being different among various prop firms, the other thing that impacts monetary gains for traders is their trading performance.

It is essential they have the skills, expertise and natural talent for performing well on the markets if they want to make more money, as their earnings are directly linked to the amount of profit they gain.

“Traders who demonstrate skill in making profitable trades while adhering to risk management rules are more likely to receive bonuses and a larger share of the profits,” Traders’ Union states.

At the same time, if the trader consistently makes losses, takes too many risks, or does not understand when is the best time to enter or exit a trade for maximum profit, they will either not earn as much as they could or make the prop firm lose money.

If this happens consistently, the client not only does not earn as much as they could, but they risk their contract being terminated by the prop firm, as it does not want to regularly lose money.

In some cases, traders can earn more money than their split if the prop firm they are using offers bonuses for good performance.

These are usually given out either quarterly or annually, and awarded to those who have hit certain targets. This could be either meeting their profit targets consistently or maintaining a low drawdown.

Bonuses can substantially increase a trader’s earnings, which is why it is imperative they perform to their best ability if they want to increase their compensation.

Something else that can affect the amount of profit a trader walks away with is the quality of the technology used by prop firms. The faster and more high-tech the software, the better it is at providing insight and predictions for the client to use.

Therefore, if they use programs that give them real-time data, comprehensive analysis, and predicted patterns, they are more likely to know the best times to act and earn more money as a result.

It is also important that a trader does not become complacent after they have passed the evaluation process and they continue their learning journey. The more they know about trading successfully, whether by undergoing training or reading more books on the subject, the more skillful they are bound to become.

Consequently, they have a greater chance of making bigger returns with their trades, which benefits both the prop firm and themselves.

Something that clients do not have much control over are geo-political events, such as economic performance, outbreaks of war or natural disasters, all of which affect the global financial market.

While this can dramatically impact a trader’s profits if their currency plummets in value, there is not much they can do if these events were unpredictable. However, it pays to stay on top of international news in case there are signs of any big stories that are likely to affect the markets.

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