Last blog, we described an fx firm that was incentivized to bring on traders who were unlikely to ever show a profit. Today, we’ll go deep into how funded trading accounts are effectively identical.
First, we need to start by defining the business model of a funded trader platform.
The wealthy investors who provide their capital to individual traders want to produce a profit on that capital. The platform creates an interview process (trading challenge) whereby the “best and the brightest” individual traders are selected to take on the management of these funds. Profits are generated. These profits are shared with the individual traders and the wealthy investors are enriched. Rinse, wash, repeat.
Perfect… very straight forward. We’re all on the same page so far (same page of a fiction novel). Now, how this actually works is very different and it involves a bit of math, statistics and… well… logic.
Let’s start with the onboarding process. These funded trading Platforms know what the Swiss fx firm also knew. 99% of all traders will eventually lose. Less than 1% of individuals have ever produced a profit above and beyond the cost of trading. So, if the business model is designed around finding that 1%… and only that 1%, that business model has already started with a big disadvantage… one that has no hope of ever profiting. And the funded trader platforms know this.
Here is the math: 100 funded trading accounts are each given a $25K account. 99 of them take a maximum loss of $1500 (because no one stops short of being told to stop trading). This leaves the one profitable trader with having to generate a profit of $148,500 on a $25K account before any profits are split. Not only is that unrealistic, it’s just fiction.
So, as a business model, how does a funded trading platform protect itself from extreme losses every month? Since it’s impossible to find that one single trader who can overcome the losses of everyone else, how does this firm (designed to make money) actually keep from shelling out money and show a profit?
Here’s the dirty little secret. (Whispering) The account you’re managing… the $25K or whatever the amount is… that “congrats, you’re funded”… and the “you’re a manager now” funded trading account that represents your ticket to financial freedom… that account… It’s not real.
It’s a demo account. All of them… every single one is just a demo account. Even after you have “graduated” or “passed the challenge” or have “become funded.” All of them are demos. There is no real money in any account at any bank or brokerage.
The reason is simple. This way the firm avoids taking a real loss accumulated by all the losing accounts while only having to shell out part of the “profits” from the winning traders.
But guys.. that still means the business is taking a loss. Even if the trading losses are fiction, the winning traders are still entitled to a profit split which represents an out of pocket loss to the firm.
That is correct. And now we turn to how the firms generate 100% of their revenue. Fees.
Everyone pays an entry fee, or a challenge fee, or a monthly fee, or a rebalancing fee or an education fee, or a lunch break fee (ok, we made that last one up… but you get the idea). These fees account for the entire business model. Without them, the entire plan falls flat on it’s face.
Additionally, if you are successful at trading and you do show an ability to generate a profit long term, that is actually costing the firm money. Your monthly fees are no longer covering the profit share they are having to shell out… and you are asked to leave. These traders are told “you are not doing well enough to continue” or “we have enough profitable traders and you are near the bottom of that range.” These traders are dismissed simply because they cost the firm money.
On the other hand, if you demonstrate an ability to take losses and continuously come back to try again, you’re encouraged to keep doing so. Just like the Swiss fx firm above and just like a casino. You’re the revenue. You’re the profit. You’re… the entire business model. Don’t be the business model.
So what should you do if you think you have the ability to trade profitably? Begin trading your own money. If those funds are too small, talk to a friend and show a convincing trading strategy whereby they would be happy to split the profits with you long term. Later, if you have really demonstrated the ability to profit and your strategy is worth something, start a fund. There are literally thousands of ways you can build a business around a solid trading strategy. None of those ways involve paying funded trading platforms to “keep trying” when you lose and “go away” when you win.
Want to learn more about how math and physics can improve your trading? Take a more analytical look at the markets and remove the emotion… and misperceptions that run infectiously through the minds of most traders. Fill in the form on our home page and a member of our team would be happy to give you a call or engage via email.