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Prop firms change the trading industry by providing traders with a new way to start their trading journey. These firms provide traders with the amount of capital and in return take a specific percentage of their profit according to the revenue sharing model. This model plays an important role in prop trading firms and specifies how these firms work and motivate their traders. This model is based on condition for exchanging profits which creates a mutually beneficial relationship between a firm and trader. But how this model works let’s discuss with important factors influencing the structure.
What is a Revenue Sharing Model in Prop Firms?
A revenue-sharing model of a prop firm is an agreement between a prop firm and its traders.
According to this agreement, the firm provides capital and resources to traders. According to this agreement, different resources like training, mentorship, and knowledge about advanced technologies are defined and how much profit will traders retain as well. This model aligns the interests of both entities as the firm’s profitability depends on the traders’ success.
The revenue-sharing percentages of each firm are different and depend on the trader’s experience and the specific terms of the agreement. Common splits range from 50/50 to 90/10 with the larger share retained by the trader.
Important Components of the Revenue-Sharing Model
Capital Allocation
Prop firms first give demo accounts to the traders and check the performance of the traders. If they fulfill the expected results of the firm then the firm allocates the capital to those traders who meet their expectations in demo accounts. Beginner traders usually start with a smaller amount of capital and can scale up based on their performance. Many firms provide scaling plans that help traders manage larger capital as they prove their profitability over time.
Profit Splits
Profit sharing is also a main factor of the revenue-sharing model. The trader’s share increases with consistent profitability and incentivizing success. Firms provide different types of profit splits like standard splits in which the standard of sharing revenue for new traders starts with 50-50 shares. Other prop firms provide performance-based splits in which the firm shares the maximum splits with their experienced traders with a ratio of 80/20 or it can be 90/10 depending on the performance of the traders.
Fees and Costs
The best prop firms work on a profit-sharing model but there are some firms that charge fees as operational costs. These include evaluation fees which is a one-time fee for participating in the firm’s evaluation program. Some firms have monthly subscriptions and charge monthly fees for the usage of trading tools. Firms also charge profit withdrawal fees that will be charged when traders withdraw their profits.
Risk Management Policies
Risk management is an important part of the revenue-sharing model. Each firm applies strict risk management rules to protect its capital. These rules include daily drawdown limits that firms set for the traders and they can’t exceed the limit of minimal drawdowns. Maximum Drawdown Limits a limit on overall losses to ensure sustainability. With the help of position sizing limits on trade size based on account balance and market conditions.
Benefits of the Revenue Sharing Model
For Traders
Traders get access to capital that helps them to trade with large amounts at a higher level without any risk of their own money. Most firms provide educational resource facilities to traders which boosts their trading skills and improves their skills for long-term profitability. Traders face lower financial risk when they trade with the firm’s money and also get a share of the profit without any risk. Successful traders can manage larger cheap funded accounts over time. When they consistently perform firms increase their capital.
For Prop Firms
When we talk about the firm benefits the firm earns a share of traders’ profits without actively trading. With multiple traders, the firm spreads its risk across different strategies and market conditions. Revenue-sharing models attract talented traders who can maximize the firm’s returns through their skills. They get experienced traders who provide them with long-term profitability.
How to Calculate a Prop Firm’s Revenue-Sharing Model
While choosing a prop firm, traders should keep different factors in mind like the profit sharing terms of the firm. A higher split ratio for traders can lead to a supportive environment. Traders must understand the calculation process to align with their trading style. They always trade with firms that contain a clear and fair evaluation process. Traders also need to calculate the availability of tools, training, and mentorship seminars as these resources always affect the development of traders. Check how frequently you can withdraw profits and whether there are associated fees or restrictions. Before signing any agreement traders must verify the policies of risk management of the firm as strict rules can affect the trading flexibility.
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