Are funded challenge type accounts ethical?


In short, no.


If you are new to these new style bucket shops, what Funded Challenge accounts offer is a 2 stage evaluation process which you buy into for a fee and are required to pass. Once you pass you are given access to a “funded” account of sizable capital.


Now the concept of trading larger capital can reap larger rewards is nothing new and there are some Prop firms out there that cater for that. However, the issue with the Funded Challenge accounts is that they are designed to make you fail.


Under law in UK and Europe all FX regulated brokers must publish their average losers. Go to any broker site and you will see that they state that a percentage of traders lose money when trading with that broker. The industry average is 76%. None will tell you this of course, but with the Funded Challenge companies that average is higher, at 93%. More on how they achieve this dubious accolade later.


What really peeves me the most is that these shops lead unsuspecting customers into believing they are trading real money. In the fine print they state, all of them, that you are trading a demo account. Even if you are the 7% that make it through to a “funded” account it is still on demo trading. They call it simulated trading, in that they may or may not hedge the trades you are doing on demo.


Now answer this question, if you are trading on a demo account do you think it fair to pay commission for each and every trade you do? That is akin to racing F1 cars on Playstation and paying for the petrol with real cash to EA sports. It is highway robbery at best. And it is just one ploy of many that these shops use to reduce your chances of passing the challenge.


Having been in the industry for 30 years (the last 10 as an FX prop trader myself), trading Stocks, CFDs, Futures and FX I am not surprised that these firms have arisen. But it really bugs me that they get away with preying on innocent, and ignorant punters. I hope that this musing might give them some awareness.


Since the Volcker rule in 2014 prop trading at banks has been banned in the USA and effectively globally. However, this also led to a rise in independent prop firms backed by wealthy investors and traders themselves. Mostly this has been in Futures and Stock markets but over the last 3 or 4 years there has been an increase in prop firms moving into the FX space. These Funded Challenge accounts do not call themselves Prop firms publicly because they cannot as they are not, but on social media or internet searches of FX Prop firms these guys pop up at the top of your search engine. So, they certainly have their SEO settings to include prop trading, to capture those looking for a prop shop.


Prop trading allows you access to larger funding, think of it this way. If you are a successful trader who makes 2% return a month but only have $10,000 capital to trade, then $200 really is just play money. However, if you got 2% return a month on $1,000,000 then that $20,000 might be enough for you to live on as a sole source of income. This is what Prop Firms offer. But you have to show a track record to get access to those kind of funds. Usually this in the form of providing a trading history of at least 2 years of profitability.


So how do Funded Challenges work?


Over the top 3 Funded Challenge firms (ranked from web traffic) their biggest seller is a US$100,000 account. You have to pay just a small $500 fee for this. Sounds great right? Right, and if you think that works, I have a number of pigs on my farm with wings on them that I can sell to you for a buck a piece.


There is an old saying in the trading world that holds true, “earn the right to trade larger size”. And with that in mind I like the idea of challenging a trader to succeed over time by hitting certain targets. Once they achieve this they can graduate to higher funding. That concept works. You build a trader’s confidence and back them as they grow. All prop firms do this.


HOWEVER. Funded Challenge accounts do not. They are designed to make you fail. And here is how.


Before I do though, let me give you some industry statistics. The average successful trader is right 60% of the time. That means they need to make their trades pay for their losing trades, so they have to have strong risk management skills and a healthy Risk to Reward ratio on their trades. Another stat is, and you can look this up, is that the top hedge funds return over 5 years is 22%. Per year.


Funded Challenges have set draw downs, some are pretty tight drawdowns of circa 5% but OK, I get risk limits and risk management, this is fine. Secondly, they have targets for you to meet which is generally double the draw down, but it is circa 10%. Again, I do not necessarily have an issue with this either. But. You then have to achieve this in a totally unrealistic trading scenario.


  1. You must trade a certain number of days – this forces you to trade, perhaps when you shouldn’t.


  1. You must achieve the target in a limited number of days, usually 30. So, if the best traders make 22% in a year, you have to make 10% in a month!


  1. You must do so, some with limited exposure or low leverage (which equals higher margin cost – which equates to smaller trade sizing therefore harder to hit target)


  1. You pay commission on the trade – which further reduces your capital and or profit. And don’t forget you are paying commission on each trade on a DEMO ACCOUNT.


  1. Can’t hold trades over the weekend.


  1. Daily draw down limits, meaning you cannot have too much exposure for too long


  1. These restrictions are often also placed on the “funded” account too.


These are just some of their ploys that I have found with them.


A fool and his money are soon parted, goes the early English proverb. Unfortunately, those who buy into these challenges are doing exactly that. Funded Challenge accounts are a house of cards, or more harshly, a complete Ponzi scheme. The old “churn and burn” is their methodology.


As no real money is placed into the FX marketplace, the only money exchanged is when you pay the fee, or those 7 percenters actually make a return and get paid. This is the only exchange or movement of cash. This is a business model in for a quick buck and certainly not seriously looking for good traders, otherwise they would be funding them with real cash.


Here are some more numbers for you. Web traffic research shows that the top 6 firms of the 22 I researched, ranked by web hits, average 350,000 new visitors every month. 55% of these visitors bounce out of the website not buying into it. That means 45% stay. Let’s say 1% of these stayers buy, that means these “shops” are selling 2,000 accounts on average per month. The average fee across these firms is USD$530, which equates to an average income of $1,000,000 per month. The top 2 though are $3.4M and $1.9M alone every month, consistently.


These firms often publish their “payouts”. One quoted recently it has paid out over $5 million since they started 3 years ago. That equates to $139,000 on average per month. Well shy of the $330,000 they pull in each month. But you can see why they design you to fail. Their only actual income is from the sale and so they need to keep selling to pay for anyone who does make it through.


Now, if you are a good trader without enough capital do not despair, there are options out there and here is what to look for.


  1. Not all prop firms are licensed and regulated but if they are, that it is a big plus.
  2. They use a reputable executing broker if not their own.
  3. They do not have trading restrictions such as the following:
    1. A minimum number of trades required to be executed
    2. A time limit to achieve target for next level
    3. Having daily draw down limits
    4. No holding trades over weekend
    5. No automated trading limits (No Expert Advisers)
  4. They are trading live accounts on live servers plugged into the FX Electronic Communication Network, i.e., not DEMO.


And if they are on demo and charge you commission on the trade(s), run a country mile and then some.