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Many of our readers may be unaware of what an evaluation-based proprietary trading firm (henceforth ‘prop firm’) is, or how such firms and businesses operate.
While prop firms are popular in the FX space, they are relatively new to the cryptocurrency sector. We believe Breakout is the first firm that leverages tier 1 crypto exchange liquidity in order to offer best in-class execution for its traders.
The core premise of Breakout’s evaluation-based trading product is to grant traders access to a demo trading environment through which they can trade global markets. The initial evaluation stage is designed for assessment and evaluation purposes, and traders who pass, then become eligible to participate in the trading stage where they have the opportunity to receive payouts based on net gains in their accounts.
Unlike a conventional trading desk, there is no interview process.
Your eligibility is determined by your ability to pass the evaluation stage(s) without breaching any of the rules.
Purchase an evaluation → gain access to an evaluation account → demonstrate your trading ability → if successful, move to the next stage and become eligible to receive payouts.
The evaluation stage is also designed to examine your risk management skills.
Prop firms will typically have a maximum daily loss and a maximum daily drawdown rule. Breaching either of these will result in failing an evaluation and/or losing access to your account in the trading stage.
A percentage of net gains, if any, achieved during the trading stage can be paid to the trader. There is usually an 80/20 or 90/10 split on net gains, with the larger percentage payment going to the trader.
The risk rules still apply to accounts in the trading stage, but there are no net gain targets that you must meet.
There are other nuances that we cover on our detailed FAQs and Transparency & Values page, but that’s really the gist of it.
Pass the evaluation, stick to the rules, and trade with an opportunity to receive payouts.
In essence, prop firms offer traders that can demonstrate their trading ability and robust risk management an opportunity to receive payouts without risking their own money in the market.
Most traders believe that they are not making money in financial markets because they are undercapitalised.
This is usually false. But as with any general rule, there are exceptions.
Specifically, there are traders that have good trading fundamentals but lack the capital base to dedicate more time to trading, or traders who know they have a profitable system and want to trade their edge with more capital.
Prop firms can be a great tool for those traders.
There are at least two other worthwhile benefits in trading with a prop firm.
First, accountability.
Specifically, accountability regarding risk management. Successful traders always manage their risk. That does not change whether you’re trading with a prop firm or trading your personal account somewhere else in the live markets.
The vast majority of breaches in trading rules and requirements are a function of poor risk management. Poor risk management is also why most traders lose money in the long run.
That is why prop firms have risk management rules. Rules lead to accountability. Accountability in risk management is necessary for profitability. If you trade with a prop firm, risk management will be at the forefront of your decision making. We believe that is a net positive for traders.
Second, diversified counterparty risk.
Prop firms usually do not require you to deposit any of your own funds in order to trade.
Instead, depending on how the firm is structured, traders gain access to the firm’s capital and/or gain access to accounts in which the gains can be withdrawn in the form of payouts.
This is especially important for crypto traders. ‘Not your keys, not your coins’. Centralized exchanges require traders to hold funds on the platform for trading. This can lead to loss of funds via insolvency, clawbacks, hacks, and other forms of counterparty risk.
Transparently, trading with a prop firm does not remove counterparty risk. Such an assertion would be dishonest. Instead, one of the main forms of risk in prop trading is payout risk (i.e. the prop firm not honoring a withdrawal). On balance, we personally believe that given that some form of risk is virtually inevitable in crypto trading, payout risk may be a ‘lesser evil’ in some circumstances than loss of personal funds.
In far fewer words: you can trade crypto with a prop firm, receive real payouts, all without custodying your crypto with a third party.
Third, humility.
Trading is hard. Most speculators lose money in the long run. Most evaluations result in failure. Trading is not for everyone.
One way to learn that is the hard way: months and sometimes years of depositing fresh funds to a broker, sometimes making money, but most often losing it all. Chasing different indicators, webinars, trading courses, bots, and systems all to end up with losses.
There is another way. Take an evaluation. At best, you pass and progress to the next stage and receive payouts. At worst, you realize you don’t have an edge or don’t have good risk management, and then either go back to the drawing board or do something else with your life. If taking an evaluation can dispel the myth of easy profitability and save you from sinking more time and money into fruitlessly pursuing short-term speculation, it might possibly be the best trade you make.