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What is a Prop Firm Challenge?

What Is a Prop Firm Challenge?

Jan 31, 2025

For traders who wish to trade large accounts but don’t have the necessary funds to do so, one of your best options is to trade for a prop firm. 

Trading for a prop firm means having access to the firm’s capital, which allows you to trade well beyond your means and often allows you to keep as much as 90% of the profits.

That said, prop firms don’t just start handing out hundreds of thousands or even millions of dollars to trade with, at least not without confirmation that you know what you’re doing and will not lose all of their money. 

This is where the prop firm challenge comes into play, a test to see if you are worthy of being allocated potentially massive amounts of funds to trade with. So, what exactly is a prop firm, what is a prop firm challenge, and how do you pass them? 

Keep reading to learn how to start trading with large sums of capital without investing any of your funds. Let’s begin by discussing prop firms. 

Contents

Key Takeaways

  • A prop firm challenge is a structured evaluation process that assesses a trader’s ability to generate profits and manage risk before granting access to a funded account.
  • Successfully passing a challenge allows traders to trade with the firm’s capital, reducing personal financial risk while keeping a portion of the profits.
  • Challenges come with strict requirements, including profit targets, drawdown limits, and consistency rules, all of which must be met within a set timeframe.
  • Risk management and discipline are crucial for success, as firms prioritize traders who demonstrate consistency and responsible trading habits.
  • Challenge costs vary by firm and account size, typically ranging from $100 to over $1,000, making it important to choose the right challenge for your skill level and budget.
  • Preparation strategies, including practicing under realistic conditions, refining a trading plan, and mastering emotional control, significantly improve the chances of passing a challenge.
  • Advanced forex courses such as Photon Trading can provide you with the necessary skills and knowledge to easily pass prop firm challenges. 

What Is a Prop Firm?

A prop firm (proprietary trading firm) is a company that provides traders with capital to trade financial markets. Instead of using their own money, traders use the firm’s funds and share a percentage of the profits.

These firms typically have evaluation processes where traders must meet profit targets and risk management rules to qualify for a funded account. Prop firms operate in various markets, including stocks, forex, and futures. 

They benefit by taking a share of the trader’s earnings while absorbing the risk. This model allows skilled traders to access larger capital without personal financial exposure beyond initial fees or deposits. However, for traders to get access to this funding, a challenge must first be passed, a test, if you will. 

What Is a Prop Firm Challenge?

A prop firm challenge is an evaluation process used by proprietary trading firms to assess a trader’s skill, risk management, and consistency before granting access to the firm’s capital. This challenge allows traders to demonstrate their ability to generate profits while managing risk effectively.

Participants typically receive a demo trading account with virtual funds and must meet specific profit targets within a set timeframe. 

They must adhere to strict risk parameters throughout the challenge, such as maximum drawdowns and daily loss limits. Successfully passing the challenge proves to the firm that the trader can trade responsibly and profitably, qualifying them for a funded account with real capital.

Now that we know what a prop firm challenge is, let’s discuss why you’d want to undertake one in the first place. 

Benefits of Participating in a Prop Firm Challenge

Participating in a prop firm challenge offers several advantages to help traders progress in their careers. This structured evaluation process allows access to capital, reduce financial risk, and earn performance-based rewards.

Here’s why taking a prop firm challenge is a great idea: 

Access to Significant Capital

One of the primary benefits of a prop firm challenge is the potential to trade with a funded account. Successful traders gain access to the firm’s capital, allowing them to place larger trades without using their own money.

With a larger trading account, traders can diversify their positions, manage risk more effectively, and take advantage of market opportunities that may not be feasible with a smaller personal account. This benefit is especially valuable for those with strong trading skills but lacking the capital needed to grow their accounts independently.

Reduced Financial Risk

Unlike personal trading, where individuals are fully responsible for their losses, a prop firm challenge allows traders to prove their skills without risking their own capital. 

The firm absorbs the financial risk during the evaluation process, providing a safety net for traders as they strive to meet the firm’s standards.

This structure enables traders to focus on refining their strategies and risk management skills without the stress of losing their own money. If they pass the challenge, they can access a funded account without making a significant financial investment.

Performance-Based Rewards

Traders who complete a prop firm challenge and receive a funded account typically earn a percentage of their profits. Most prop firms offer profit-sharing agreements in which traders keep 70% to 90% of their earnings while the firm retains the remainder.

Some firms also provide scaling opportunities, meaning that traders who consistently meet profit targets and follow risk management rules can gain access to even larger accounts. These structured rewards encourage traders to maintain consistency and discipline, as continued profitability increases earning potential.

Opportunity for Professional Growth

Beyond financial benefits, a prop firm challenge helps traders develop discipline, risk management skills, and a structured approach to trading. 

The challenge enforces strict guidelines that require traders to focus on consistency rather than high-risk, short-term gains. Meeting these standards can improve long-term success, whether within a prop firm or in independent trading.

Moreover, passing a prop firm challenge can serve as a stepping stone for traders looking to transition into full-time proprietary trading. 

Gaining experience in a professional trading environment, following structured risk management rules, and learning to trade with a disciplined mindset can significantly contribute to long-term career growth in the financial markets.

With the benefits of a prop firm challenge covered, let’s discuss the stages you’ll have to go through to be accepted into a prop firm. 

Stages of a Prop Firm Challenge

Prop firm challenges typically consist of multiple stages designed to test a trader’s ability to generate consistent profits while managing risk effectively. These include the initial evaluation, advanced evaluation, and funding phases, although this may differ slightly from one prop firm to another.

Here’s what you can expect in terms of prop firm challenge stages. 

Initial Evaluation

The first stage of a prop firm challenge involves trading with a demo account using virtual funds. Traders must meet specific profit targets while staying within predefined risk limits, such as maximum drawdowns and daily loss thresholds.

At this stage, the goal is to demonstrate discipline, risk management, and the ability to execute a profitable trading strategy under controlled conditions. Firms assess whether traders can follow guidelines while maintaining consistency in their performance.

Advanced Evaluation

Traders who pass the initial evaluation move to a more demanding phase, where stricter rules and higher profit targets often apply. Some firms introduce additional requirements, such as a minimum number of trading days, specific risk-reward ratios, or limitations on position sizing.

This stage tests a trader’s ability to adapt to evolving market conditions while maintaining consistency and risk control. Success at this level indicates that a trader can handle larger capital responsibly.

Funding Phase

Upon completing all evaluation stages, traders receive a funded trading account and access the firm’s capital. At this point, they trade real money and earn a percentage of the profits generated.

Maintaining the discipline and risk management demonstrated during the challenge is essential. Firms monitor performance to ensure traders adhere to risk parameters and maintain long-term profitability. Long-term success in proprietary trading depends on consistency, patience, and managing losses effectively.

As mentioned above, there are specific requirements you’ll have to meet certain parameters and pass the conditions of the challenge. So, what are the conditions of a regular prop firm challenge? 

Common Requirements for Passing a Prop Firm Challenge

Proprietary trading firms set specific standards that traders must meet to qualify for a funded account. These requirements assess a trader’s ability to manage risk, maintain consistency, and achieve profitability while following strict trading rules. 

While the exact conditions vary between firms, most challenges follow similar guidelines, as follows:

Profit Target

One of the primary requirements is reaching a predetermined profit target within a set timeframe. 

Typically, traders must generate a profit of 5% to 10% of the initial virtual account balance. This must be achieved while adhering to all risk management rules, ensuring profitability is based on disciplined trading rather than high-risk speculation.

Drawdown Limits

Risk control is a crucial aspect of the challenge, and traders must stay within specific drawdown limits. Many firms enforce both daily and overall drawdown restrictions. 

A daily drawdown limit caps how much the account balance can decrease in a single trading day, often set between 3% and 5%. 

An overall drawdown limit, which applies over the entire challenge period, generally falls within the 8% to 12% range. Exceeding either of these limits results in immediate disqualification.

Consistency Requirements

Consistency is another key factor in passing a prop firm challenge. Many firms require traders to distribute their profits evenly over multiple trades rather than relying on a few high-risk positions. 

Some firms impose restrictions on position sizes or enforce a minimum number of trading days, often between five and ten days, to ensure traders can sustain their performance over time. These requirements prevent traders from taking excessive risks to meet profit targets too quickly.

Risk Management Compliance

Risk management is closely monitored throughout the challenge. Some firms require traders to set stop-loss orders on every trade to protect against excessive losses. Others may restrict hedging, which involves opening opposite positions in the same asset simultaneously. 

Certain firms also limit trading during high-impact economic news events to reduce exposure to extreme volatility. Failure to comply with any of these rules can result in challenge failure, even if the trader meets profit targets.

Time Constraints

Challenges typically last between 30 and 60 days, and all requirements must be met within this period. 

Some firms offer the option to extend the challenge for an additional fee if a trader is close to passing but needs extra time to reach the final targets. However, exceeding the time limit without completing all requirements usually results in disqualification.

Two-Phase Evaluation Process

Many prop firms use a two-phase evaluation process. The second phase often has a lower profit target and a longer time frame, allowing traders to demonstrate continued consistency. 

This ensures that traders are profitable and capable of managing risk and adapting to different market conditions. Before issuing a funded account, firms may conduct a final review to confirm that all rules have been followed correctly.

Before we discuss some tips on passing funded account challenges, we must address an important issue: their cost, as they are generally not free to undertake. 

Start learning from Photon Trading to gain the necessary experience to pass all stages of funded account evaluation. 

How Much Do Prop Firm Challenges Cost?

The cost of a prop firm challenge depends on the firm and the account size a trader selects. Most proprietary trading firms charge an initial fee to participate in their evaluation process, which covers access to a demo account and the opportunity to qualify for a funded account.

Fees typically range from $100 to $1,000 (although these can be significantly higher depending on the firm), with higher fees corresponding to larger funded account sizes upon completing the challenge. 

Some firms also offer tiered pricing, where traders can choose from different funding levels based on risk tolerance and profit targets. Since these fees are usually non-refundable, traders should carefully review the pricing structure and conditions before committing.

Some prop firms provide free challenges as an alternative to paid evaluations. While appealing, these no-cost options often have restrictions, such as smaller funding allocations, stricter profit targets, or higher competition due to a larger number of participants.

Before entering a prop firm challenge, traders should assess their budget, experience level, and trading goals to determine whether a paid or free option is right. 

While there is an upfront cost, successfully passing a challenge and securing a funded account can provide access to significantly larger trading capital, making the investment worthwhile for disciplined and skilled traders.

Before paying to take a prop firm challenge, it is, of course, a good idea to prepare first, so how do you prepare for a prop firm challenge? 

How to Prepare for a Prop Firm Challenge

Preparing for a prop firm challenge requires a structured approach that includes developing a solid trading plan, practicing under realistic conditions, and mastering emotional control. 

Each element is important in improving your chances of passing the evaluation and securing a funded account.

Here’s what you know about preparing for a prop firm’s challenge:

Develop a Solid Trading Plan

A well-defined trading plan is the foundation for success in a prop firm challenge. Traders should outline their strategy in detail, specifying entry and exit criteria, position sizing, and risk management rules. 

A structured plan helps maintain discipline and consistency, which is essential for meeting the firm’s requirements.

Setting realistic daily and overall profit goals can provide clarity and direction throughout the challenge. 

Furthermore, traders should establish clear guidelines for handling winning and losing trades to prevent emotional decision-making. A strong plan not only guides execution but also ensures that trading remains systematic and controlled.

Practice in Realistic Conditions

To succeed in a prop firm challenge, traders must be comfortable operating under the firm's specific rules and restrictions. Practicing with a demo account that simulates these conditions is an effective preparation method.

During practice, traders should adhere to the same profit targets, drawdown limits, and risk management guidelines they will face in the challenge. 

This allows them to develop familiarity with the evaluation process and refine their strategy accordingly. Consistently trading under similar conditions can help build confidence and ensure a smoother transition when the challenge begins.

Master Emotional Control

Emotional discipline is a key factor in passing a prop firm challenge. The pressure of strict risk limits, time constraints, and performance requirements can lead to impulsive decisions driven by fear, greed, or frustration. Learning to manage emotions effectively is essential for maintaining consistency.

Traders can develop emotional resilience by using techniques such as mindfulness, deep breathing exercises, and journaling their trades to analyze decision-making patterns. Having a support network of experienced traders can also provide valuable perspective and help reinforce disciplined habits.

Maintaining composure during both winning and losing streaks is critical. Reacting impulsively to short-term results can lead to poor decisions, while a steady, rational approach increases the likelihood of long-term success.

In addition to this preparation, you should consider some other strategies to maximize your chances of getting funded. 

Top Strategies for Passing a Prop Firm Challenge

Passing a prop firm challenge requires a disciplined approach that prioritizes risk management, consistency, and strict adherence to a trading plan. Traders who succeed in these evaluations focus on preserving capital, executing trades systematically, and demonstrating long-term profitability.

Here’s how to pass that challenge: 

Prioritize Risk Management

Effective risk management is essential for passing a prop firm challenge. Traders must stay within the firm's drawdown limits while maintaining a balanced approach to risk and reward. 

This includes setting appropriate stop-loss levels, carefully managing position sizes, and avoiding overexposure in any trade.

Rather than chasing profits, traders should protect their account balance and minimize losses. 

Prop firms look for individuals who can sustain profitability without violating risk parameters. A trader who consistently manages risk well has a far greater chance of passing than one who takes aggressive risks for short-term gains.

Maintain Consistency

Consistency is one of the most important factors in a prop firm challenge. Prop firms prefer traders who can generate steady, reliable returns rather than those with unpredictable, high-risk trading patterns. 

Instead of taking large positions hoping for quick profits, traders should focus on executing high-probability setups with a structured approach.

To build consistency, traders should maintain a steady trading routine, avoid overtrading, and resist the urge to make drastic changes to their strategy. Staying disciplined throughout the challenge and making calculated decisions improves the likelihood of passing.

Stick to Your Trading Plan

A well-defined trading plan is essential for success, but it is just as important to follow it consistently. Traders often struggle when they deviate from their strategies due to emotions, market volatility, or the pressure of reaching profit targets. 

Staying committed to a structured plan prevents emotional decision-making and keeps trading systematic.

While some adjustments may be necessary to adapt to changing market conditions, traders should avoid making impulsive changes mid-challenge. Regularly reviewing the plan to ensure it aligns with the firm's rules and performance goals can help maintain focus and discipline.

Is a Prop Firm Challenge Worth It?

A prop firm challenge can be a valuable opportunity for traders looking to access significant capital without risking their own funds. Traders who successfully pass gain access to a funded account, where they can trade with the firm’s capital while keeping a substantial portion of their earnings.

However, prop firm challenges are not without their difficulties. They require adherence to strict rules, consistent profitability, and sound risk management. Failing to meet these criteria can mean losing the initial challenge fee, making preparation essential. 

Traders must ensure they have a well-defined trading plan, a solid understanding of the firm’s requirements, and the emotional discipline needed to trade under pressure.

For those with a structured approach, strong market knowledge, and the patience to develop their skills, passing a prop firm challenge can open doors to professional trading without the financial burden of personal capital investment. 

Photon Trading provides the necessary resources to prepare effectively, with tools and strategies to enhance your trading plan and emotional discipline. To get started, get your free trading course and cheatsheets.

Frequently Asked Questions

How Much Do Prop Firm Traders Make?

Entry-level prop firm traders make an average of $50,000 to $120,000 annually, with higher level traders having the potential to earn over $1 million per year. 

What Happens If You Fail a Prop Firm Challenge?

Failing a prop firm challenge usually means losing the entry fee, as most firms do not offer refunds. Some firms allow traders to retake the challenge at a discounted rate, while others offer free retries under specific conditions. It's essential to carefully read a firm's policies before signing up.

Can You Withdraw Profits During the Challenge?

No, traders cannot withdraw profits during the evaluation phase. Since the challenge is conducted on a demo account, any profits made serve only to meet the firm’s targets. Profit withdrawals become possible only after securing a funded account.

Do Prop Firms Allow Traders to Use Automated Trading Strategies?

Some firms permit automated strategies or expert advisors (EAs), while others prohibit them to ensure traders rely on skill rather than pre-programmed systems. Always check a firm’s terms and conditions regarding automated trading before entering a challenge.

Is It Possible to Trade Multiple Prop Firm Challenges at Once?

Yes, many traders take multiple challenges from different prop firms simultaneously to increase their chances of passing at least one. However, this requires careful risk management and the ability to stay organized under multiple sets of trading rules.

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