What is Funded Trading?

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Contributor, Benzinga
January 11, 2024

Today’s financial world is constantly evolving because of advances in technology, changes in the way people invest and the rise of alternative currencies. While trading is attractive to many and investors have big ideas to test in the market, the time-tested adage “it takes money to make money” remains true for traders.

Funded trading seeks to remove the barrier of having significant capital from younger traders who may be just starting out. Funded trading provides younger investors who already have solid records of profits the opportunity to earn compounded returns with lower initial minimum investments. 

What is Funded Trading?

Funded trading offers the resources of an institutional financial company to an individual trader. Before funded trading, employees of large firms and people with the largest bank accounts had a big advantage over new investors by trading with a larger balance. Short-term trading using a larger initial investment helps compound returns with smaller percentage movements, which may allow them to take profits earlier.

Funded trading firms offer resources that go beyond just capital. If approved to be a funded trader, an individual is granted access to funds and also to a company’s brokerage platform and can make trades on behalf of the company. This means a funded trader has access to trading in different markets and without fees, something individuals who are trading lack or have to work toward to achieve. In exchange for providing funding, the firm takes a percentage of the trader’s earnings. 

How Does Funded Trading Work?

If funded trading sounds too good to be true based on the description above, know that there are nuances to the business. Not everyone can become a funded trader, and even experienced investors may have trouble getting funded. 

Many companies offer funded trading, and they are not all reputable. Part of being a funded trader is finding the system that works for you and that you can trust. The following are the basic steps you’ll go through to become a funded trader with most providers.

1. Select a Company and (Usually) Pay a Fee

Companies that fund traders usually have a successful track record of adding traders to their teams who know what they’re doing and won’t lose the firm’s money.

For most funded trading opportunities, an applicant must pay an upfront fee to be assessed as a trader. This test can take on different forms, but typically they must show their worth by piloting a demo account and producing good results consistently before being handed the reins to a funded account.

If an applicant does not pass the evaluation, the upfront fee is usually not refunded. If they do pass, the fee can be refunded once they make enough money for the funding company.

2. Trade Within the Company’s Rules

Once funded, a trader can begin using the funding company’s platform to trade on several exchanges. Depending on the company, traders can work in futures, crypto or traditional markets.

Keep in mind that funded traders are not trading on their own behalf but on behalf of the funding company. This method is an advantage not just because of the access to funds, but also because funded traders can jump in and begin immediately trading in any market the company has access to without having to jump through all the hoops that an individual trader would.

Funding companies have different rules that must be followed regarding how much can be traded per day, and some have complex drawdown rules and a zero-tolerance or “strikes” policy if these rules are not followed. Review your company’s rules thoroughly before you start trading to avoid making a costly error. 

3. Withdraw and Scale Your Trading

Depending on the company you choose to trade with, the profit split can be as high as 90% going to you and 10% to the company. Assuming you follow the company’s trading rules, you are generally free to trade as you see fit. Access to funded capital allows for bigger returns than if you were trading with your own funds, which can help you see larger returns.

Most funding companies charge a fee per month based on how much capital you have access to. If you find success with trading and borrow more money to invest through your funding company, it’s possible that you’ll pay a higher percentage in commission. Review your company’s fee schedule before you trade to know exactly what you can expect to see in your account at the end of the trading day. 

Benefits of Funded Trading

Funded trading hasn’t been around for very long, but it puts traders without deep pockets and little access to margin trading on the same level as those with large bank accounts and established reputations. 

Funded trading can be a great equalizer in the trading market when used correctly. Some of the benefits that you might enjoy as a funded trader include the following. 

  • Access to more capital: The premise of funded trading is its largest benefit. Traders can access greater sums of money by working with a funding company and can reap larger profits much faster than if they were using their own funds. 
  • Access to markets: Depending on the market you want to trade on, you might need to meet some type of regulatory standards before you can open a brokerage account to begin investing. This could also mean opening an account with multiple brokerages, which might mean meeting multiple minimum balances. With a funding company, you may be able to skip all these steps, instantly gaining access to the company’s platform and resources. 
  • Work on your own terms: Funded traders are basically freelancers for funding companies. As a funded trader, you have the freedom to work whenever and wherever you would like. There is no set schedule — and while some funding companies do expect a certain amount of trades to be made in a given time period, most funded traders are free to work at their leisure. 

Considerations With Funded Trading

Funded trading is a relatively new option for people looking to make some major moves in the stock market, and it doesn’t come without some considerations for those looking to get funded.

  • It’s for professionals: Not just anyone can become a funded trader. Funding companies take steps to ensure people who will be investing their funds are qualified, and if a novice trader tries to pass their certification without preparing, it's likely they will waste the fee it takes to attempt to gain access to funds.
  • Predatory funding companies: Traders looking for funding must be careful when selecting a funding company. Always read the fine print and make sure profits are possible given monthly fees and the split of profits you have to share. Because it’s a relatively new practice, some companies have moved in to try to take advantage of would-be traders. 
  • Regulations for trading: Another area where reading the fine print is important, many funding companies set stringent rules for their traders with little to no wiggle room for mistakes. Make sure you read the trading requirements of a funding company before moving forward. 

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Frequently Asked Questions

Q

What does getting funded mean in trading?

A

Getting funded in trading means that you have passed an introductory test and you are authorized to use a company’s funds to trade on their behalf, with the promise of a split of any profits to be made.

Q

How much do funded traders make?

A

Most traders can expect to take 80% to 90% of the profits from their funded trades before fees are paid to the company. 

Q

Is funded trading worth it?

A

Funded trading can be worth it for individuals who have a well-tested and profitable trading strategy, but it also comes with its own set of challenges and risks.

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.