Lesson 1: Scaling Plans of Different Prop Firms
Lesson 1: Scaling Plans of Different Prop Firms!
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Proprietary trading firms, often called “prop firms,” provide capital to traders to conduct trading activities on their behalf. These firms vary significantly in size, structure, and approach to trading. One critical aspect that sets them apart is their scaling plans. Scaling plans are the plans employed by prop firms to allocate capital to traders and determine how to expand or contract their trading capital. In this blog, we will explore the different scaling plans used by prop firms.
Different Prop Firms Scaling Plans
There are four types of Scaling Plans. Let’s dive into them individually and see which prop firm has them.
Fixed Scaling Plan
In a fixed scaling plan, a trader can only scale up a fixed amount based on the profit they make on their funded account, which remains constant regardless of other aspects. E8 Funding employs this Scaling plan. (E8 Account/E8 Track, not ELEV8 since it differs). Traders can request their profit share at the end of each trading period. The firm will send you 80% of the profits you have earned and add back the balance before the withdrawal to increase your account size.
This plan offers stability and predictability for traders, as they know precisely how much scaling and profit they have at their disposal. It can also help traders manage risk more effectively, as they won’t be subject to dramatic fluctuations in capital.
On the downside, a fixed scaling plan might limit the potential for traders to grow their capital if they consistently outperform their initial allocation.
Performance-Based Scaling Plan
In a performance-based scaling plan, the trader’s initial allocation and subsequent capital are determined by their trading performance. Traders who consistently demonstrate profitability and low-risk trading strategies are rewarded with increased capital. My Forex Funds Evaluation Program has this type of Scaling Plan.
This plan incentivizes traders to perform at their best, as successful traders can access larger amounts of capital. It also encourages risk management and disciplined trading practices. However, performance-based scaling plans can be challenging for traders facing drawdown or loss periods.
Tiered Scaling Plan
The tiered scaling plan combines elements of both fixed and performance-based plans. Traders start with an initial fixed capital allocation, and as they prove their trading skills and consistency, they move up through tiers, gaining access to more significant capital amounts. The 5%ers Hyper Growth applies this Scaling Plan. (Since it is based on levels, which you qualify when you reach a specific profit target)
This plan strikes a balance between stability and growth potential. It allows traders to start with a reliable base and gradually increase their allocations as they prove their abilities.
The challenge with the tiered scaling plan is that traders might feel pressured to meet performance targets to advance to higher tiers consistently. It could create a stressful environment, and some traders might need help progressing even if they have the potential for success.
Risk-Adjusted Scaling Plan
A risk-adjusted scaling plan focuses on managing the risk associated with a trader’s performance. Instead of solely considering profitability, this plan considers a trader’s risk-adjusted returns, ensuring traders are not rewarded exclusively for taking excessive risks. Funded Trading Plus use this Scaling Plan type (Since it has a trailing drawdown limit, it scales your account to a new size, plus adds the profit made in the previous level).
This plan encourages traders to prioritize risk management and consistency in their trading strategies. It can lead to more stable and sustainable trading operations for traders and the firm.
However, implementing risk-adjusted scaling plans can be complex, requiring advanced risk assessment models and data analysis. It might also be challenging for traders to fully understand how their risk-adjusted returns are calculated.
Conclusion
In conclusion, scaling plans are a crucial aspect of how prop firms operate and support their traders. Each approach has advantages and disadvantages, and the right plan for a firm will depend on its goals, risk tolerance, and trading philosophy. Understanding its scaling plan is essential for traders looking to join a prop firm to align its trading style with its objectives.
