Prop Trading vs. Self-Funded Trading

By the time you decide that trading is going to be a serious undertaking, you should be clear on how to raise capital. Before proprietary trading became a thing, the only possible way to raise funds was from one’s own pocket. But now, you can opt for a funded account from a prop trading firm. The choice between self-funding and prop trading shapes not only how you’ll operate in the markets but also your risk exposure, psychological approach, and potential for growth.

Proprietary trading (prop trading) describes the situation where you take positions in the market using a funding company’s money. You and the firm then decide how to split the profits. On the other hand, the self-funded route involves using one’s own money as capital. Of course, each approach has upsides and challenges. What are they? Which approach is right for you?



The difference between these approaches may appear obvious, but nothing can’t be too far from the truth. That explains the WHY of this article. The article unbundles the two trading models, covering everything from capital requirements and profit structures to psychological factors and regulatory considerations. The primary goal is to avail the insights needed to determine which approach best fits your trading goals, risk tolerance, and available resources. And as a matter of fact, it doesn’t matter what your current station in the trading career is; what’s more important is understanding these differences so that you can make the best decision possible. Let’s get to work.

What Is Prop Trading?

On the face of it, the term “prop trading” doesn’t refer to anything closer to funded trading. Instead, prop trading is when a financial firm, like an investment company or bank, uses its own money to buy and sell financial products like stocks, currencies, and futures. This implies that, normally, such firms trade with clients’ money and only earn through fees and commissions. That’s actually what happens.

But dig a little deeper, and you will find that prop trading can involve a firm providing capital to a trader to trade on its behalf. So, instead of the proprietary trading firm going into the market by itself, it subcontracts this activity to an individual trader. When the trader turns in profits, the firm takes a cut, and the trader pockets the rest.

A little confused? Let’s see if an illustration will make things clear.

How Prop Trading Works: An Illustration

Suppose a company, Company X, is a proprietary trading firm—it uses its own money to buy and sell financial instruments. But, having determined that hiring individual traders to take positions in the market on their behalf is much more profitable, the company recruits Trader A. 

The company takes Trader A through an evaluation round to ascertain their suitability. After passing the challenge, the firm opens an account for the trader and funds it with $100,000. The firm instructs Trader A to only trade currency futures and follow specific rules. 

After 30 days, Trader A earns a $10,000 profit. According to the firm’s profit-sharing agreement, Company X takes 20% ($2,000), and Trader A keeps 80% ($8,000). The firm also monitors the trader’s activity to ensure he manages risks appropriately. That way, the company can benefit from the trader’s skills while limiting potential losses. 

Key Aspects of Prop Trading 

This illustration reveals several facts about prop trading.

First, prop trading firms must test traders’ skills before they give them capital. The evaluations often have several KPIs—for example, a trader must hit a specific profit target while remaining within set risk limits.



Second, prop trading firms rely on several rules to guard their money. Once they fund you, you must operate within these guardrails, which typically include:

• Maximum drawdown limits (how much you can lose overall)
• Daily loss limits (how much you can lose in a single day)
• Position size restrictions (how much risk you can take per trade)
• Trading hour limitations (when you can and cannot trade)
• Minimum trading days (how active you need to be each month)

Third, traders earn from the profits they make. Prop trading firms usually spell out in their terms how much each party takes home. For example, Company X, in the illustration, claims 20% of any profits Trader A makes, leaving the trader with the largest share.

At the end of the day, this trading model benefits both the firm and the trader. For the former, it leverages the trader’s expertise to generate profits without directly managing the trades. On their part, traders can expect higher potential earnings because they have access to substantial capital.

What Is Self-Funded Trading?

Costs, Fees, and Evaluations

Trading isn’t free, regardless of which route you take. Do you prefer prop trading? It has a price tag. The personal account, too, has costs.

Prop Trading: The Upfront and Ongoing Costs

When you opt for funded trader programs, the evaluation fee is the first expense you’ll encounter. The fee is like the entrance ticket to the funded trading space.

Evaluation Fees

Some traders like to think of evaluation fees as their first investment. And they’re not wrong. One expects that the money they spend will be recouped at a later date.

Each prop trading firm conducts its own version of evaluation, although the general principle is the same. You pay for a challenge, take the test, and proceed depending on your performance. The price you’ll pay for a specific challenge depends on the firm’s rates and the account size you’re aiming for.

But there is no guarantee that you’ll pass on the first attempt. If you fail, most firms require you to pay again for another shot. Some spend thousands of dollars on evaluation fees before finally securing a funded account. Looking at this from another perspective, it is like paying for education in risk management the hard way.

Recurring Costs With Funded Accounts

Evaluation fees are only upfront costs. Once you pass and get funded, you’re likely to encounter additional costs, such as:

• Monthly subscriptions to maintain your account
• Fees for trading software access
• Real-time market data fees

These recurring costs chip away at your profit share, so always factor them in when comparing offers from different firms.

Self-Funded Trading: The Hidden Price Tags

You might think that going it solo is much more straightforward cost-wise, but expenses can add up here too.

Brokerage Commissions and Spreads

Every trade you make comes with a cost that manifests in the form of forex spreads and futures commissions. If you prefer stock trades, the broker may charge a certain amount, typically under $5, for each position. 

Your trading strategy may also impact your costs. For example, a high-frequency trader might rack up hundreds of dollars in commission costs monthly, while a swing trader might pay significantly less.

Platform and Data Costs

Professional trading requires professional tools:

• Charting software: $20-$300 monthly (TradingView, NinjaTrader, etc.)
• Scanner subscriptions: $50-$200 monthly
• Market data feeds: $20-$100+ monthly depending on markets traded

Unlike prop trading, where these costs might be bundled or covered, self-funded traders pay for each service separately.



Don’t forget the time aspect. If you consider the time spent taking challenges as a cost center, then the prop trading route has a few more hidden costs. Although, one may consider this a small price to pay compared to the money one might lose in the first few trades in a personal account. Traders that take this route might want to cut corners because, after all, it’s their money, and they can do whatever they want.

Much of trading is all about managing risk. With serious money on the line, especially for funded accounts, you must have a solid plan to protect against downside risks.

Prop Firms Have Strict Risk Management Requirements

We stated earlier that prop trading firms require prospective traders to undergo rigorous testing before they earn a funded account. The primary objective, as we also stated, is to ascertain that the trader in question can deliver profits. However, we should add that the evaluation also seeks to determine your ability to play by the rules. 

Prop firms have a number of rules that guide traders to protect their money, including:

Daily Loss Limits

These limits are the maximum amount of money the funding company will let you lose in a single trading day. Lose anything above this limit, and the firm will stop you from trading for the rest of the day.

Maximum Drawdown Thresholds

Beyond daily limits, there’s usually an overall account drawdown limit. This is the largest acceptable decline in your trading account’s value from its peak. Most funding companies will close your account if you exceed this limit.

These rules may be rigid but necessary from the funding company’s perspective. From the trader’s perspective, however, they create an environment where they feel like they’re trading with training wheels that they can never take off. Be that as it may, the restrictions enforce discipline that many traders struggle to maintain on their own.

Self-Funded Means Freedom, but Can Also Mean Self-Destruction

With the training wheels off, you have the freedom to bite as much as you like in terms of risk-taking. But this scenario can be liberating and dangerous at the same time.

Usually, there is a psychological difference between following someone else’s rules and sticking to your own. For instance, when a prop firm says, “You cannot lose more than 5% in a day,” the consequence of breaking that rule is immediate—your account gets suspended or terminated. 

But when you set your own risk limits, you’re both the player and the coach. After a bad trade, your inner voice may convince you to ignore the limits and stretch the luck further. Suddenly, a  2% rule becomes 5%, then 10%.



The difference often comes down to accountability. External rules create external accountability, while self-imposed rules require something much harder to maintain – self-accountability. It’s the same reason people hire personal trainers when they could just follow a workout routine on their own.

Trading Psychology & Accountability

If you’ve spent some time in the market, you’d know that trading is more than just numbers and charts. It’s a mental experience that can feel like an emotional rollercoaster. How your brain handles this rollercoaster differs depending on the trading approach.

Mental Pressure in Prop Trading

Prop trading firms impose rules on traders to guard their money. These restrictions can be beneficial and detrimental at the same time.

How Rules Force Discipline

We saw earlier that funded traders must operate within set guidelines. Funding companies have tight control over most aspects of trading, including how much loss you can make and even how many times a month you can be active. These guardrails keep you from making the classic emotional mistakes that destroy trading accounts.

The Flexibility Trade-Off

But that discipline comes at a cost. What if your strategy occasionally needs room to breathe? What if your best set-ups happen during news events that your funding company prohibits?

The rigid rule structure can prevent you from executing your full trading strategy. Some traders find themselves constantly looking over their shoulders, second-guessing trades that might push close to rule violations, even when those trades align with their strategy.

The Psychological Weight of Self-Funded Trading

Trading your own capital also can burden your mind. But this experience creates an entirely different psychological environment.

There’s something different about watching the money you struggled to earn fluctuate with each market move. This direct connection to your personal finances can lead to:

• Hesitation to enter valid trades (fear of loss)
• Premature exit from winning positions (fear of giving back profits)
• Overtrading to “make back” losses quickly
• Decision paralysis during volatile market conditions

On the flip side, there is the kind of autonomy that funded traders can never dream about. You can trade exactly how you want, when you want, without anyone looking over your shoulder. You can modify your approach on the fly, take calculated risks when opportunities arise, and learn from mistakes without immediate punishment.

This freedom can be incredibly valuable—if you have the discipline to handle it.

Building Psychological Resilience in Either Model

Regardless of the situation, developing mental toughness is non-negotiable.

For Prop Traders:

• Embrace the rules as protective rather than restrictive
• Practice trading within constraints, even in demo accounts
• Develop strategies that thrive within the rule structure
• Focus on consistency rather than home-run trades

For Self-Funded Traders:

• Create your own firm rules and write them down
• Set up automatic stops to remove emotional decision-making
• Consider using trading journals to track adherence to your rules
• Practice stepping away after losses to prevent emotional decisions



For Everyone:

• Develop a detailed trading plan before the market opens
• Track your emotional state along with your trades (embrace journaling!)
• Remember that one trade doesn’t define your trading career
  

Regulatory, Tax, and Legal Considerations

Many countries recognize trading as a legitimate job. In the United States, for example, the government created an organization (the Commodity Futures Trading Commission (CFTC)) that oversees trading activities in futures and options markets. 

However, codifying trading as a genuine income stream has implications. For a start, your trading activities must take place within the law. Most importantly, you are expected to submit a piece of your earnings to the tax authorities. 

Different Tax Treatments

The way you receive money from trading affects how it’s taxed. For instance, income from prop trading arrangements typically comes as profit shares paid to you personally. As such, this can possibly be categorized as independent contractor income. In places like the US, this kind of income often requires quarterly estimated tax payments.

On the other hand, income from personal trading activities is often treated as capital gains, which may attract lower tax rates in places like the US. You may also offset gains with losses when they happen.

The point is that the tax treatment you get on your income depends on where you live. Some jurisdictions may classify funded traders as employees, and others view them as contractors. This impacts how tax is applied to the income. For this reason, you may have to do more research work on your end to understand how taxes and other regulations apply to you as a trader—funded or not.



To that end, you might want to get clarity on issues such as:

• How trading income is classified in your jurisdiction
• Whether prop trading creates an employer-employee relationship
• Tax deductions available to each type of trader
• Reporting requirements for foreign trading accounts (if applicable)
  

Bottom Line

The choice between prop trading and self-funding isn’t just about money—it’s about finding the trading environment that brings out your best performance.

Throughout this discussion, we’ve explored how these two approaches differ in fundamental ways. Prop trading offers access to substantial capital without requiring a large personal investment, but it comes with profit-sharing and several restrictions. Self-funding, on the other hand, gives you complete autonomy and lets you keep all your profits, but it demands significant personal capital and robust self-discipline.

We’ve also seen how these approaches create different psychological environments. In prop trading, you must learn to cope with external accountability. Although this arrangement forces beneficial discipline, it might create performance anxiety. In contrast, self-funding offers complete freedom but requires facing the emotional challenge of risking your money.

That brings us to what to consider when choosing which direction to go. Some critical factors include:

• The available capital and your risk tolerance
• Your preferred trading style. Do you thrive with structure or flexibility?
• If you prefer immediate income or long-term account building

If prop trading appeals to you:

• Research reputable firms with fair evaluation criteria
• Practice trading within typical prop firm parameters
• Prepare for the psychological shift of trading someone else’s money



If self-funding feels right:

• Develop a detailed trading plan with clear risk parameters
• Set up proper monitoring systems for accountability
• Consider working with a mentor for objective feedback