Funded accounts, is that easy earning a $250,000 Trading Account?
Introduction – About retail trading and funded accounts
Welcome to the wonderful trading world, so, you have been trading for a couple years with decent results, but you are starting to realize that in order to make a living with your trading, you need more money. Sound familiar?
This is problem that some traders will face in their careers, of course, that will be if you are already a profitable trader, because we know that is something reserved for people who think outside the box and studies the market, and not for those who fall for scams like basic technical analysis (yes, I’m a technical analysis hater, go Systematic or go home).
Anyway, before going on, this is why most traders lose money over time and even how they will be kept inside a destructive circle.
So, let’s move on, you are a profitable trader but you don’t have enough money to make trading your primary income source, it happens.
Then after finding out ways to make money online you find some proprietary firms and their funded accounts, firms that are willing to give you a funded account if you pass some tests proving that you are very profitable in a short period of time.
Are those funded accounts worth it?
I can imagine right know what you are thinking, doesn’t take a telepath to know what you’re thinking.
If I talk bad about those accounts, people will think that i’m not profitable, and if I talk good things about them, it implies that I’m a profitable trader. Is that thinking right? No. We aren’t living in the nineties anymore, internet marketing has been “a thing” for a long time.
When we are talking about funded accounts we can talk about the same sellers and “marketers” that used to sell binary options and Forex affiliates to make some money. Its just the new fad.
They are popular because people get paid to promote them, and if they do a great work, they will win one for free without passing any test. There’s no business in lending you money to trade, but in collect it with application fees, it is another way to collect risk premia, just like investing.
Basic Math is heavily involved, and this is why i always tell a fact: You have to know very well how your trading systems works and the importance of backtesting in order to understand how you will perform.
Reason 1 – Mathematics, time and costs
The cost of those accounts is fairly high if you study the average time needed in order to pass the trials, in order to do that we need to have some statistics about our systems.
Do you trade every single day? If you do that, it will take you only 15 days in the best scenario, if you have a good streak, but if you have a trading system with good ratios, its very rare to be trading every day.
What is your average profit per trade (Expectancy)? PS: You have to account bad trades too, and the percent rate of winning trades.
In futures trading, the average expectancy for one contract will be between $14 and $60 in small value contracts like Soybeans and Soybeans Oil. It may be bigger if you trade contracts like ES (S&P 500 Index futures) or contracts like that. That depends on you, but, anyway, let’s move on.
If my expectancy is $20 that doesn’t mean that each of my winning trades have a $20 profit, since i may have losing trades (as everyone, no, you can’t win forever) and some trades it will make a $700 profit, others $30 profit and the rest it will lose $600, as an example, so variance will play a role in this situation.
Remember, expectancy is the average profit for all trades, winners and losers.
Time to do some basic math: Trade expectancy and profit objective to have an account.
For a $50,000 account the profit target is usually between $3,000 and $6,000 and we can trade up to 3 contracts, this rules tend to be proportional to the account size.
I’m going to stick with the $3,000 profit target, and i’m going to say that i have a trading expectancy of $20 per contract, so using 3 contracts i will have a $60 expectancy.
3,000 / 60 = 50 Trades in average if i trade everyday.
I will need three months to pass the test on average, with an estimated cost of $165 per month that will be $495.
This is accounting that our systems will not exceed the maximum drawdown with 3 contracts, and with most systems you are risking a lot, remember the variance of your trading systems. You can have 3 losses on a row and blow up your account.
With 2 contracts maybe you will be more secure trading without losing neither tour funded account or trial. And…
3,000 / 40 = 75 Trades. And remember, we are trading everyday, which is very uncommon. Four months are $660
Now, if we have our trading systems filtered, it usually will open a trade every few days, usually a trade in 3 days. Let’s multiply our costs by three.
495 * 3 = $1,485
660 * 3 = $1,980
Almost $2,000 US Dollars in costs in order to pass the trials without risking blowing up your account trading with abnormal risk, keep in mind that, even if they let you trade with a $50,000 account, your maximum risk will be $3,000, you are going to spend two thirds of that trying to win an account.
The expectancy as you can see is very low since the costs are way to high in order to be able to risk $3,000 with 3 contracts, and yes, margins are high and that’s why you need the rest of the money. But keep in mind your drawdown, trading is a long term run, doesn’t matter if it is with funded accounts or with your own money.
With $2,000 you can day-trade a lot of futures contracts.
And even if it won’t solve your money issues, you can save money each month while trading, and your chances will be higher than funded accounts.
Reason 2 – Diversification and inefficiencies
Trading times are restricted, and in case of a financial crisis restrictions became worse as Topsteptrader did, say goodbye to overnight trading when most of the market edges happens.
In the chart shown we can see a interesting trading system based on buying soybeans’ oil in the last 20 minutes of the day and selling it after the first hour. Since this is an overnight system, is forbidden.
Systems that are based on collecting a risk premia holding an asset when it is closed, like buying S&P500 on a Friday and selling it the next Monday are forbidden.
Same happens with macroeconomic releases. Due time restrictions, to the max.Drawdown stablished you won’t be able to diversify your positions. Most likely, you will be trading one or two systems in most of the cases using funded accounts.
Reason 3 – Potential earnings and account duration.
This one is complicated, first of all, in the long run you are going to earn the 80% of what you win, and that will be hurting your Expectancy (once again, yes), instead of $100 on average, you will be making $80, and the final question is, how long are you going to last?
Funded accounts have a lot of rules, some make sense, others don’t. But the main point here is, given the number of rules, risk parameters and such, accounts doesn’t tend to last long. If you trade during a US holiday, you are out. If you trade during a minor economic release that the firm considers important, you are out. If you hit a small drawdown you are out.
If you read online reviews, most traders will lose their accounts in less than three months, and since they don’t trade with the same frequency (and luck) than the trials (because they don’t want to spend a lot of money, so they leave everything to luck).
And what’s the point on paying $2,000 for funded accounts and earning back just $1,500?
Why funded accounts are so popular
As i said before, the main reason is marketing, as everything on trading, in fact, funded accounts are very similar to risk premia, since most of the traders aren’t going to win an account, you are collecting premias knowing that a minority of traders will won an account and you will have to pay them for a little time.
Does it sound familiar? Yes, same thing as investing on the stock market, is all about collecting risk premia.
Funded accounts are in this case the risk, even if it is controled by a maximum drawdown.
But the marketing industry couldn’t care less about that, if there is a commission to be earned they can tell marvelous things about the product, and even dishonest business practices. I’ve been publicly “known” on the Spanish Trading scene for a while and I’ve had crazy offers for promoting dishonest brokers, and some friends and colleagues had their fair share with funded accounts.
“You can tell that you are a Funded Trader to everyone, we are ok with that as long as you sell our service” and things like that, yada yada yada.
I’m not as “famous” as my peers, and i don’t give webinars to brokerage firms, but i always get some interesting information about the dirty work of brokers, funded accounts providers and others.
Looking for the future – Alternatives to funded accounts to make money
Let’s cut to the chase, you still need money in order to make a living with your trading? Yes, you do, and you have many options then, but it won’t come to you instantly.
Savings + Growth is the best formula, if you can set aside a few hundred each month and you have a decent run trading, in a couple of years you can have an decent sum on your account thanks to compound interest, and you can make another interesting extra with trading knowledge, you can sell some trading systems (on the Tradestation and Metatrader market places for example), and you can code for others that don’t want to learn how to code, but still need some tools or automatic algorithms.
You can also create courses that give value to the people (please, don’t create another useless scam, the internet is already full of them, have some ethic, don’t copy books and other courses), doesn’t matter if it is trading related or not at this point, even a guitar playing course is a good side-gig at this point. Get involved in your community and try to be helpful. A good friend of mine makes a living giving one-on-one coding classes for example. It started as a side-gig but grew up to be a business over the course of time.
I do the last thing, here is my algorithmic trading course, which is a translation from my Spanish one with 139 Students (at 07/23/2020), and i use it to save more money to my account along with the money i earn trading giving people my whole method to study the market, i teach a part for free on Youtube and for those who want to go deeper they have my course. In English too.
Yes, it’s not a $50,000 account, neither $250,000, but i can manage risk how i want and think its better than funded accounts, also i can trade overnight and best of all, it’s my money, and since i want to make a living with my trades, i need to save a lot, i’m glad to say that i’m in a good path to do that while giving value to the community, both for free and paid.
So, side-gigs like courses, selling trading systems, coding for others, writing technical books on Amazon… Things like that, keep it simple, you can save money from your regular job and make a little more with that, so you will be able to have an interesting account while you are still learning instead of wasting money on funded accounts.
In summary – Final notes
Funded accounts aren’t as profitable as they seem, they are just another marketing product so trading influencers can make some money on your expense, the same as forex affiliates, and for those who don’t know me, i’m fine with selling services, courses, brokers or whatever, but only if they give you something valuable and not a scam similar to the lottery, yes, they are going to pay you but your expectancy is negative.
The path “to wealth”, as it is so popular today, doesn’t have any shortcuts and it is focused at the long term with skills and hard work, sorry to crush some people’s dreams, but that’s a fact.
And as you can see, from funded accounts to trading, mathematics are often required to avoid bad things that will drain your money.
Funded accounts are a great example about how financial scams work, and no, funded accounts aren’t a scam in the full sense of the word, they are just like lottery, in most cases you are going to waste your money.
I hope this can help you, even if people tend to “hate” listen to things like this, i still think that they are neccesary living in a digital world full of ads and dishonest practices. Stay safe.
Víctor – Follow the edge.