How prop trading works - FTMO, The5ers, FundedNext

Retail prop trading is not a job at a fund in London. It is a business model in which a prop firm gives virtual capital (and sometimes real capital) to traders who pass a verification process called a challenge or evaluation. You are not an employee. You do not manage client money. You trade on a demo account, and the firm pays you a share of the profit from the simulation or hedges your trades in the real market. Understanding this model is the condition for not falling into the trap of thinking “I get 100k and I can do whatever I want”.

The real service a prop firm sells is three things: 1) access to the platform and the accounts, 2) a set of hard risk rules, 3) a profit-split system. The rest is marketing.

Lesson goal and what you will measure

After this lesson you will be able to:

• Distinguish the A-Book, B-Book and hybrid models in prop.
• Compare the 1-step, 2-step and instant funding models.
• Read a contract and terms of service for the key risks.
• Measure the cost of an attempt: the challenge fee versus the expected value.

Measures at the end: a comparison table of 3 firms, a 12-point terms checklist, a calculation of the effective cost of capital.

The prop firm business model - where the money comes from

For most prop firms, 99% of revenue comes from challenge fees on evaluations that are never passed. That is not a moral accusation, it is an economic fact. Only 5-12% of traders pass phase 1, and 2-7% reach a first payout. The firm therefore has to protect itself with rules.

There are three approaches to risk:

Pure B-Book (most of the market): All trading happens on demo. The firm does not place positions in the market. Your payout is a marketing cost for the firm. The firm can afford payouts because the losers finance the winners. The rules are hard so that lottery players get filtered out.

A-Book (rare, usually The5ers in its long-term programs): Profitable traders are copied to the firm’s real account. The firm earns in the market, not only on fees. That is why it cares about low volatility and the longevity of the trader.

Hybrid (FTMO, FundedNext in some programs): Some traders are on B-Book, others on A-Book. An algorithm decides based on consistency, holding time and correlation with risk.

For you as a trader this has no operational significance. You trade as if the capital were your own. But it does affect which behaviours the firm rewards.

Funding models: 1-step, 2-step, instant

FTMO set the standard: 5% daily drawdown, 10% max, an 8%/5% target, a minimum of 4 days, no gambling around news. 90% of the market copied that standard.

The5ers took a different route: the Bootcamp program starts at 5-20k and doubles the account after every 6% target. There is no reset to zero after one mistake - you drop back to a lower level. This is a model for long-term, low-risk traders. The second program, High Stakes, is a classic 2-step.

FundedNext introduced a 15% share of the profit from the challenge phase, no time limit in Stellar, and an Instant option. It competes with low fees and fast scaling.

What you actually get after passing

You get access to an account. It can still be a demo with a promise of a payout. Only a payout is proof that the firm has liquidity. Check:

1. Does the firm have an auditable payout history of more than 24 months?
2. Do the terms define daily DD as balance-based or equity-based?
3. Is there a consistency rule (for example a maximum of 50% of profit from a single trade)?
4. Are EAs, copy trading and hedging between accounts allowed?
5. Is holding through the weekend and through news allowed on a funded account?

cost_of_capital = challenge_fee / (probability_of_passing * funded_capital)

Example: 540 EUR / (0.07 * 100000) = 7.7% cost of acquiring capital

This is not “a cheap 100k for 540 EUR”. It is an expensively paid option on access.

When the plan says do not trade

• If you have not read the full terms PDF + FAQ + contract - do not trade.
• If you do not know whether daily DD is measured from equity or balance at 0:00 CET.
• If the firm has <12 months of history and no Trustpilot record with payouts and more than 1000 reviews.
• If the terms let the firm treat your strategy as “gambling” or “toxic flow” without a definition.
• If you have another evaluation open that mentally consumes your daily loss limit.

The mistakes that cost the most

1. Confusing prop with a broker. Thinking that the spread and slippage will be identical to an ECN broker. On prop the spread is often wider plus a hidden commission. You are not testing on the firm’s demo.
2. Ignoring the definition of DD. 80% of disqualifications are daily DD on equity, because the trader holds a floating -4.9% and opens another position.
3. Buying an account that is too large to start with. 200k with a 5% daily limit is only 10k of room. On 25k you have 1250 USD, but psychologically you learn for 540 EUR versus 1080 EUR. Start with 25k/50k.
4. No journal of the rules. The firm is not evil - it simply enforces an algorithm. If you do not log the time of your trades, you will not notice that you are breaking the 2-minute rule.

Measurable exercise

48h task: audit 3 prop firms

1. Download the FTMO, The5ers and FundedNext terms (current version).
2. Fill in 12 questions in a table:

3. Calculate the cost of 3 attempts for each firm. Write down the conclusion: which firm fits your strategy (for example news, holding over the weekend).

Test yourself

1. How does B-Book differ from A-Book, and why do most firms start with B-Book?
2. What does a 5% daily DD measured from equity at midnight CET mean, and how does it affect open swing positions?
3. Why is a 2-step model with an 8% + 5% target statistically harder than 3x6% in Bootcamp?
4. List 3 clauses in the terms that can void a profit even when the % target is met.
5. How do you calculate the effective cost of capital if the pass rate in your group is 6%?

Frequently asked questions

Are prop firms a scam? The model itself is legal. What turns into a scam is a lack of liquidity for payouts, asymmetric rules and marketing that promises “easy 100k”. Verify the age of the firm, the custodian, and the reviews about payouts.

Can I have several prop accounts at the same time? Yes, most firms allow you to combine up to 400k. Watch out for copying identical trades between accounts at different firms - it can be treated as the same flow and banned.

Can I use TradingView on prop and copy signals? Only if the signal is not copied en masse by thousands of traders (a so-called public signal). If 200 people enter on the same tick, the firm will detect it.

How long does passing a challenge realistically take? The median among those who pass is 45-90 days for a 2-step. An attempt to pass within the minimum 4 days ends in a daily DD failure in 87% of cases.

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This course is educational in nature. Prop trading carries the risk of losing the evaluation fee. This is not investment advice.

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