A proprietary trading firm, or prop firm, offers traders the use of the firm's capital in return for a share of the profits. Access is through an evaluation, usually called a challenge, which the trader pays a fee to attempt. Pass it and the firm allocates a funded account, typically simulated, on which the trader keeps most of the profit, commonly 80 to 90 per cent.
How a challenge works
Most evaluations have two phases. In the first, the trader must reach a profit target, often 8 to 10 per cent, without breaking any rule. In the second, a lower target, often 5 per cent, under the same rules. The rules are the substance. A maximum daily loss, commonly 5 per cent of the starting balance, measured from the balance or equity at the start of the day. A maximum overall loss, commonly 10 per cent. A minimum number of trading days. Sometimes a consistency rule, limiting how much of the profit can come from a single day, and restrictions on holding positions over the weekend or trading around news.
Break a rule at any point and the account is closed and the fee is spent. The firm's business depends on most people failing, and most people do.
Where the rules bite
The daily loss is the one that ends most attempts. At one per cent risk per trade, five losing trades in a day is a breach, and a multi-market system can have five positions open at once. Floating losses count in most firms' calculations, so an open position that falls four per cent and then recovers has still been measured at four. The overall loss is usually a fixed figure from the starting balance and does not rise as the account grows, so early profits give little cushion.
A trader risks one per cent per trade on a £100,000 challenge with a 5 per cent daily limit. On Wednesday four positions are open, each one per cent at risk, and a US inflation figure moves everything at once. Three stop out and the fourth is 1.5 per cent underwater at its worst. The measured daily drawdown reaches 4.5 per cent. The account survives by half a per cent. At one and a half per cent per trade the same day would have failed the challenge, and the fee would have paid for the firm's marketing.
Most firms permit EAs, some restrict them, and the rules should be read before a challenge is bought. An EA suitable for a challenge needs total open risk well inside the daily limit, its own daily and overall loss stops set below the firm's so that it flattens and pauses before a breach, and a news filter where the firm requires one. Some EAs offer a dedicated prop or funded-account mode with exactly those guards. It reduces the risk of a breach. It cannot remove it, because the firm's measurement, the fills and the spread at the moment of a shock are outside the EA's control, and the trader is responsible for the account either way.