If you are thinking about taking part in a trading challenge and getting a funded account, you might be worried that prop firms are scams. Don’t worry, you are not the only one who thinks this and it is an understandable concern to have. In this article, we will talk about prop firm scams and give some suggestions on how they can be avoided.
Is Prop Trading A Scam?
No is the short answer, proprietary trading is not a scam. It has been around for many years, even before the internet and introduction of online prop firms. Back then, prop traders could join a traditional bricks and mortar prop shop where they would be trained to trade the capital of the prop firm.
Nowadays, anyone can join a prop firm and take part in a trading challenge. This is the evaluation process you go through for a prop firm to determine if you are a good enough trader if you pass a prop trading challenge, you can get a funded trader account and take home a substantial share of the profits.
This sounds pretty straightforward right? Well yes, provided the prop trading is done legitimately with a reliable prop firm that do what they say they are going to. The problem is that just like any business where there is money to be made, there are people who will try to take advantage of unsuspecting victims and rip them off. That is where prop firm scams come into the equation.
Are Prop Firms Scams?
Not all prop firms are scam, otherwise the industry would cease to exist. There are some good prop firms out there who want to find successful traders so both parties can enjoy profits together. However, it is fair to say that some prop firms scam traders by claiming to offer funded trading accounts when they have no intention of doing so.
Why would they do this? The answer is very simple. The scam prop firm just wants to make money by selling trader challenges without actually funding the honest traders who meet the objectives of the challenge without breaching any of the rules. They will pull all sorts of made up rules from thin air to deny traders a funded account and when they run out of excuses, they might just disappear altogether.
How Do Prop Firm Scams Work?
There are a variety of ways in which a prop firm will try to scam you, some more obvious than others. By being aware of what to look for when choosing a reliable prop firm, you can avoid getting scammed and wasting your time trying to chase a funded account that doesn’t actually exist. Here are a few ways in which scam prop firms operate.
Moving the goals posts
Some scam prop firms will make up the rules as you go along. They may have one rule for some traders and another for others. If you achieve a profit target and stay within the maximum drawdown allowed, it might all of a sudden change. The prop firm will keep changing their trading terms and conditions in order to try and catch you out to make sure that you fail the trader challenge so that they don’t need to give you a funded account.
There have been instances where prop firms have scammed traders by making up rules that did not exist, just to make sure they fail the challenge or lose access to a funded account do they won’t have to pay out. You should read all of the terms in detail and even save them offline. This will make sure you know what is allowed and what is not, with evidence to prove your case if you feel like you have been scammed by a prop firm.
Whilst settings unrealistic targets will not automatically make a prop firm a scam, it can be a sign that they are not seriously looking for funded traders. Of course, they want to filter out the good from the bad traders, but if the profit target is 20% per month instead of 10%, that shows they are making things difficult. After all, a 10% profit per month would be considered amazing by even the best traders in the world. The majority of retail traders don’t make that in a year.
If the maximum loss is 5%, they are not giving the trader much room to breathe. Would it really make a huge different to allow a 10% drawdown? Probably not, but it could certainly help traders get funded when you consider that the majority of retail traders lose money. There is a fine line between filtering out profitable traders, and making things way too difficult.
Not using a real trading account
Although it is quite normal for proprietary trading firms to use simulated demo accounts rather than real live accounts, some would argue that this is a sign that they are not planning in paying out any profits you earn. If you trade very well and all of the profits are on a demo account with a scam prop firm, they might not payout.
For instance, if you make a 20% profit in one month on a $5,000 funded account ($1,000) and have a profit share of 90%, you should be entitled to a $900 payout. If this was on a real account then the prop firm could pay you the $900 and still be $100 in profit, so everyone is happy. However, if this was on a demo account, the prop firm will need to pay you $900 out of their own pocket!
Not paying out
This is arguably the worst prop trading scams of them all. This is when you invest time and money to pass a trading challenge, then get access to a funded account which you continue to be profitable on. You may spend months getting to this point and be excited to get your first payout.
However, your share of the profits never come and the scam prop firm uses delaying tactics and makes excuses as to why they will not pay you. If you have breached the rules, that is fair enough. Just keep in mind that as we mentioned above, some prop firms will make the rules up as they go along.
If you want to avoid a prop firm not paying out, you can shop around to ensure that you are using a company that has a proven track record of funding and paying traders. They should have screenshots as evidence and genuine feedback online from real prop traders. Just be wary that some scam prop firms can use false testimonial to entice new victims.
Another way in which prop trading firm scams catch you out is through false advertising. They might use paid actors for video testimonials and create false statements of payout that never actually happened. You will see that some prop firms have hundreds of very similar top-rated reviews on Trustpilot. This could be a sign that they have paid for positive feedback and the worst prop firms will even try to report or deny any negative feedback to protect their facade.
If you see a prop firm that offers a scaling plan into the tens of millions of dollars, take a step back and think to yourself if this is realistic. They would need huge financial backing to be able to scale prop traders with funded accounts that high. This could just be an advertising ploy to try and sound more impressive than legitimate prop firms that operate within their own means.
What If I Have Been Scammed by A Prop Firm?
Unfortunately, there might not be much you can do other than report them to your payment provider and leave a review online to warn other prop traders. This is because the vast majority of prop firms are not regulated because they don’t need to be. As they are not providing any financial advice nor technically any financial service per se, they can avoid regulation.
You can always look for a prop firm that partners with a regulated broker but that still does not guarantee they will operate in an open and honest manner. It would be much easier to avoid prop firm scams if the industry was regulated, but until then you should be on guard and make sure you only consider the most reliable prop firms with a good reputation such as FTMO.
The online prop trading industry is still relatively new and due to a lack of regulation, there are unfortunately prop firm scams that are luring in unsuspecting victims with the false hope of getting a funded account if they pay a fee to take part in a prop firm challenge.
Sadly, the reality is that the scam prop firm is just making money from normal people who dream of becoming traders by charging them this fee. Even experienced traders who pass the challenge can still be denied a funded account for a plethora of implausible reasons.
For that reason, make sure you do your own due diligence and implement some of the tips covered within this article to make sure that you only work alongside legit prop firms.