In prop trading, you get two frameworks to choose from. The instant funding allows traders an easy start, with no aptitude test. Whereas the challenge model is a bit more restrictive in curating candidates. It assesses and rates their skills and appoints only the best performers.
The variation often drives traders interested in prop trading nuts. They search for resources, seek advice, and still can’t decide on one. The reason largely lies in the size of the upfront payment, trading style, profit margin, and regulatory structure. As they all vary based on the framework.
This article will free you from decision paralysis, explaining
- What instant and evaluation models are
- How they differ from each other
- What to consider while choosing one
Let’s start by scratching the concept of prop trading first. It will help you go deep into the context of the instant and challenge models, and understand the grounds on which they differ.
Table of Contents
What is Prop Trading?
Proprietary trading offers traders a way to enter the market without investing their own money. They get a share of the company fund, as virtual money, which they can bet on tradable assets.
The prospect is alluring without a doubt. Especially for those who are struggling or can’t join the market due to the shortage of capital.
In prop trading,
- All capitals are virtual and offered by the firm
- To join, traders either take an exam or pay an upfront fee
- Once firms are convinced of candidates’ skills and potential for earning, they offer a sizeable capital
- The firm sets risk management measures by setting conditions, like trailing drawdowns and position size limits
- Traders earn from their profits shared at a fixed percentage
- Firms have strict regulatory guidelines to control operations and maintain reputations
This settles the core scaffolding of the proprietary trading model. However, based on the registration process and how other rules are implemented, it branched into instant funding and challenge categories.
Let’s take a deep dive into them.
What is Instant Funding?
Instant funding is what it reads… Instant!
Expert traders who are confident about their game, have what it takes to cash the market, and play by disciplinary rulebooks, instant funding is their quickest buy-in to the market. All they do is pay an upfront amount to their chosen prop firm, land on the virtual platform, and start working from day 1.
Key features of instant funding include:
- Pay-to-Play: Prop trading is a partnership model, where profits are shared between the broker and the trader. And instant funding uses security money (upfront) to register this partnership. It’s the only requisite to start, and the size of the payable varies based on how large a trader wants to begin.
- No Wait, No Evaluation: The firm offers a ready-to-trade account the moment the fee is paid. With literally zero waiting time, as the need to sit an exam is not there.
- Stricter Rules, Less Profit: As traders get in without demonstrating their skills, companies draw bold sidelines to control their moves. The drawdown and profit margin are smaller compared to the other model.
What is a Challenge Model?
A challenge model tests and rates a trader’s skill before onboarding them. The test is to find out how traders react to the price shifts and whether they can make money out of it. And the rating helps firms to figure out the size of the rewarded account.
Though a challenge often sounds scary to new traders, it is the simplest and most lucrative prop trading framework. Why? Because, unlike instant funding, most firms offer fee-free challenge models. Even if some do require an upfront, you can easily ignore the amount.
Here is what you get by surfing a challenge model:
- A Two-phase Evaluation Program: Arranged in a customized real-time trading environment, a challenge provides you with test money, throws you right into the market, and sees how you do. Your performance determines the size of the account you receive after the test.
- Training Program: I know a test is often the last thing someone wants. It pushes them to the edge, makes them feel insecure, and look for an alternative route. But an alternative is only for traders who already have a balance to bet on. For new traders,
- Larger Drawdown, Scaled Profit: Passed traders get more freedom in making decisions, taking risks, as they can leverage and use a higher percentage of their account in their daily trading. Firms also allow them take the most, often 80 to 90% of what they earn.
What Should You Choose?
By now, the concept of prop trading types should be clear to you. No need to confuse yourself over instant vs challenge prop trading, if you simply can decide on:
- Your Expertise: Instant funding prop firm is a more common choice among seasoned traders, who know they can make it big, whether the situation requires them to go long or short. The challenge mode is for everyone. It’s the easiest gateway to the trading real for beginners. And for veterans, it’s the most lucrative way to trade.
- Capital at Hand: It’s simple, and it’s straight. To opt for instant trading, you must have some money in your pocket. If you don’t, the challenge mode is there for you.
- Wait Time: If you can’t wait, and lie over the time taken by challenge mode, as every day means thousands of dollars to you, instant trading can be your right choice. However, as this is not the case for most traders, the wait for the challenge to end is worthwhile.
Wrapping Up
Don’t lose yourself when navigating prop trading, especially in the discussion over instant funding vs challenge model. The line between them is thick enough to notice from a mile away. Instant trading lures traders by catering to their need to start immediately. Whereas a challenge model’s worth lies in its flexible system, nominal entry fee, stable risk management, bigger leverage and margin, and the maximum profit margin.
