Online prop firms are a great vehicle to increase your trading profits and start trading much larger trading accounts than most traders have available to them, solely using personal capital.However, with recent events, like MyForexFunds being hit with regulatory investigations and halting all client accounts, it’s more important than ever to understand how you can reduce the risks of being scammed by a prop firm. In this article, we’ll look at 5 steps you can take to ensure you stay as safe as possible when obtaining funded trading accounts. So, let’s get into it!
Reducing The Risk Of Being Scammed By A Prop Firm
As of 2023, the prop firm industry is still not regulated by financial governing bodies in the same way the retail brokerage industry is regulated. This means that some companies will be able to operate in unethical manners without a great deal of consequence for them.However, as we have all witnessed recently, the regulators are starting to pay attention to the industry. This is an excellent thing for traders around the world! Regulation increases the safety for traders and ensures the likelihood of being scammed is greatly reduced – allowing the real prop firms to continue operating with the traders’ best interests at heart.
We, at Lux Trading Firm, are looking forward to the prop firm industry being regulated. We are confident that should regulations soon be imposed, compliance would not be an issue for us as we operate on real market activities, which is fundamentally different from schemes like MyForexFunds we see going under.
The 5 Steps To Reduce the Risk Of Being Victim Of A Prop Firm Scam
Until regulations are put in place, there are still certain steps traders can take to stay as safe as possible:
1. Transparent Company Ownership
The ownership of prop firms should be incredibly easy to obtain. Ideally, on the companies website, there should be a number of company registration numbers and registered addresses.We’ve seen, with many of the demo/pyramid scheme style prop firms, there is no discernible way to verify who owns the company or holds shares within.This, in any industry, is a huge red flag and prop firms like this should be entirely avoided. This also stands for the emerging market of ‘crypto only’ offshore based prop firms that require minimal KYC processes to get traders signed up.You may think the prop firm is doing you a favor by allowing you to use crypto. In reality, you’re just giving them the greenlight to ensure they never have to pay withdrawals and can go under at any point with no repercussions.
2. Work With A Real Money Prop Firm, Not A Pyramid Scheme Prop Firm
We break this down in much more detail in our ‘MyForexFunds – What Can We Learn’ blog post. Regardless – there are two types of prop firms in the industry:
- Real Money Prop Firms (Like Lux Trading Firm)
- Demo Prop Firms (Like MyForexFunds)
Real money prop firms fund traders with live money within the markets. Therefore, these prop firms only make money from profitable traders! The more profitable traders, the more profits for the prop firm. However, if no more profitable traders ever signed up, the prop firm would still be absolutely fine, as each trader is only paid from the profits they personally make in the markets! This is the polar opposite for the demo trading prop firms. Demo prop firms give traders demo accounts within the markets. Therefore, these traders are never earning a profit. Each withdrawal they take, must be paid by the sign-up fees paid by other traders. Where else would the money come from, right? So, if no more traders ever signed up, profitable traders would eventually drive the company to go bust, as they can only pay profitable traders from other traders fees – like a Ponzi scheme or pyramid scheme!
Therefore, real money prop firms are the only prop firms that will stand the test of time and regulation in the industry! Demo prop firms are just well-dressed pyramid schemes.
3. Check Third-Party Reviews
Traders have a habit of jumping to the next shiny object, whether that’s a new trading strategy or a new prop firm. In reality, it’s much better to work with established prop firms with strong foundations. You can check third-party sites like Trustpilot to gauge the experience traders are having with a prop firm, and this usually paints a fairly good picture. We would say that you cannot take these reviews as gospel, as they certainly are not, but they’re definitely useful as a part of a larger picture. You can view Lux Trading Firms reviews here on Trustpilot!
4. Don’t Put All Of Your Eggs In One Basket
There’s no reason that you need to put all of your eggs into one prop firm basket, or even into the prop firm basket as a whole. We always strongly urge our funded traders to continue trading their personal trading accounts and capitalize on their trades in as many ways as possible, strengthening their overall trading portfolio. This diversifies your trading portfolio and further reduces risk. Operationally/logistically, it can be hard to manage replicating trades onto more than one trading account if you’re doing this manually – but there are trade copier tools that can automate this process. For example, you could be trading one of our Elite Trader funded accounts with $2,000,000 in capital. Your trades would also be automatically copied onto your brokerage account and potentially another prop firm account too. This is a great way to not just reduce risk but also increase your profits from trading!
5. Take Regular Withdrawals
Many traders love the idea of compounding trading accounts to larger sums of money. It makes sense, and compounding is a great way to increase your account size over time. However, when it comes to prop firm trading, we highly recommend the traders pay themselves! Even if you’re only moving the trading profits to your personal brokerage account, ensure you get paid for your efforts. If you’re working with a reputable prop firm, they should be willing to increase your capital without the need for you constantly compounding your trading account. For example, our Elite Traders can reach $10,000,000 in trading capital by following the profit milestones set out – without ever needing to compound their trading accounts.
Think Long Term With Compliance In Mind
The sad reality is, the industry is not regulated as yet. However, this doesn’t mean you shouldn’t be thinking in terms of regulation. Is the FCA or any governing body/regulatory going to be ok with prop firms that can only pay out traders from other traders losing? No, that is a Ponzi scheme – hence why MyForexFunds had its assets frozen.Would the FCA or another regulator be ok with the business model Lux Trading Firm follows? A business model that has been around in the regulated prop firm space for 40+ years? Yes!
If you start thinking this way, you’re much less likely to get stung by a prop firm getting turned over by regulators!
In Conclusion – Can You Reduce The Risk Of Being Scammed By A Prop Firm?
In summary, there are things you can do to reduce your chance of being scammed by a prop firm as the regulators come knocking!
Looking to get funded? Work with Lux Trading Firm now!
Forex Prop Review just updated their list of Prop firms who offer Real Money Live Accounts, and boy, even we were surprised. I bet you will be too, after checking out their updated Real-Money list
