Trading one’s own capital versus utilizing funding from an external proprietary trading firm are two very different models for account funding. Both options have potential upsides as well as disadvantages that should be compared. Depending on individual risk tolerance, experience level, account size and more – one model may prove to be a better fit and option over the other.
When self-funding a trading account, a trader is depositing their own capital earned through savings, investments or other means to trade the markets. Some key attributes of using a self-funded model:
- You maintain full flexibility and autonomy over all trading decisions without oversight. Whether day trading stocks, swing trading options or position trading futures – the trader gets to set their own strategy rules.
- Since it is your own capital, all net trading profits after any commissions or fees are yours to keep. However, losses come straight out of your account balance.
- Self-funding requires having adequate capital to properly size positions and withstand normal market volatility. Experts recommend at least $25,000+ to fund an active stock trading account. Options and futures may require more available capital to be traded effectively.
Alternatively, traders can seek out opportunities like Funded Trading Plus and apply for account funding through an external proprietary trading firm (prop firm). With this model:
- Rather than putting your own capital at risk, these firms provide starting capital after a trader passes an evaluation. For futures traders that start up funding can exceed $100,000+ sometimes with high leverage.
- Provided the trader follows set risk guidelines, none of their own capital needs to be at risk while accessing significant leverage from the firm’s capital.
- There is typically profit splitting however between the trader and the backing firm. A 70% cut to the trader and 30% to the firm is common – although ratios vary.
- Strict loss limits are enforced, such as a max 10% account drawdown. If violated, the trading account, privileges and access to the trading capital can be revoked and suspended.
- Full autonomy over all trading decisions and strategy rules
- 100% of net profits after fees belong to the trader
- Ability to grow your own personal account over time
- Avoid profit sharing arrangements
- Flexibility to change markets, assets and timeframes traded
- Losses come directly out of the trader’s capital and savings
- Requires substantial upfront capital to properly size positions
- Difficult to quickly scale up strategies and compound profits
- Limited by personal capital level for account growth
- High emotional toll if trading main source of income
Externally Funding Pros
- Access to trading capital without needing to risk personal money
- Increased buying power and leverage amplifies profit potential
- Split profits but avoid directly funding losses
- Learn with guidance of pros and risk controls in place
- Ability to scale funded account to 6 and 7 figures with consistency
External Funding Cons
- Oversight limits full flexibility in decision making
- Strict loss limits require discipline to not violate
- Overall profit splits reduce total trader income
- Funding can be revoked if guidelines and limits breached
- Application, evaluations and verification requirements
Comparing Key Difference and Factors
Now that both models have been explored at a high-level, what are the major considerations to determine if self-funded or externally-funded trading makes the most sense?
Trading with your own capital that you accumulated over time leaves that money and savings exposed to market risk and losses. The trader must be fully comfortable with that chance of loss. If risk tolerance is lower or loses would create high emotional duress, self-funded trading may not be ideal for those traders initially.
In contrast, trading via outside funding means $0 capital at risk from the trader. The firm providing the trading account and capital takes on that risk exposure. This fund model aligns well for those still validating and testing their strategies.
Funded account traders make an agreed upon cut of generated profits, often 70-90% – but the exact ratio depends on the firm. Some specialize in offering higher splits. So while not the full 100%, the splits still reward traders significantly for their skills.
In addition, leverage means substantially more buying power. That amplifies the profit potential in dollar terms. $100,000 funded accounts can make significantly more than trading a $10,000 self-funded account obviously.
So in summary, self-funded accounts keep a higher percentage of profits, but the leverage and Buying power makes the profit potential of externally funded accounts greater in total dollar terms. Both offer strong incentives.
Decision Making and Oversight
With self-directed funding, the trader maintains full autonomy over their trading business and strategy rules. This aligns best for experienced traders with validate methods. They want to grow their own accounts without interference.
However, external funding does come with strings attached typically. To access the leveraged capital backing, traders must adhere to risk limits, maximum losses and other guidelines. This may create some frustration over limitations if a trader is used to full discretion.
The account size and buying power varies greatly between the funding models. In self-directed accounts the trader is limited by how much they can personally fund or grow the account over time internally. Adding new capital from outside sources can be challenging.
Externally backed accounts routinely provide over $100,000 in buying power to start. And the firm’s total capital means the ability to scale up over time if the trader has proven skills that deserve more backing. Access to leverage provides and advantage.
When Does Trading With Outside Funding Make Sense?
Under what circumstances does seeking a funded prop firm account make the most sense over self-funded accounts?
- Limited Capital: You currently lack enough personal capital to properly fund a trading account. Funding provides account leverage.
- Gain Experience: Newer traders can benefit greatly from funded firm oversight and support while refining skills without money at risk.
- Strategy Scaling: Traders with a validated strategy can scale quickly to 5, 6 or 7 figure sizes through external funding faster than growing internally.
- Risk Management: Strict maximum loss limits require discipline – but also provide enforced risk controls while learning the markets.
In summary, funded trading aligns best for newer traders, those with limited capital, or experienced traders with proven methods that deserve sizable backing. The profit splits seem reasonable if the funding facilitates larger profit generation.
Determining whether to trade your own capital (self-funded accounts) or trade backed by an external prop firm (externally-funded accounts) has many considerations. Do the advantages of accessing leverage and risk controls outweigh profit splits and loss limit frustrations? There are good arguments on both sides.
For some, starting with external funding to establish and refine an approach before self-funding makes sense. Ultimately assess your situation carefully in terms of risk preferences, account size goals, experience level and factors unique to you. Both models can facilitate success with the right trader and commitment to sound trading principles.