How do prop trading firms work?

By Kraken Learn team
6 min
27 August 2026
Key takeaways

  1. Prop firms work in three steps: an entry fee, an evaluation, and a funded stage where you trade the firm's capital.

  2. The evaluation tests a profit target against a drawdown limit, and staying above that limit matters as much as hitting the target.

  3. Challenges are genuinely difficult by design, and most applicants do not pass on their first attempt, industry-wide.

  4. Kraken Funded uses a fixed 3% drawdown floor with no separate daily limit, which is stricter than at some other firms.

  5. You can access three tiers on Kraken Funded: Starter ($1,000), Mid ($5,000), and Anchor ($10,000), each with its own entry fee and profit target.

The short answer

Most prop trading firms work in the same general way. You first pay an entry fee to start a trading challenge that requires you to demonstrate your trading skills.

If you hit a profit target without breaching a drawdown limit, you will be able to trade the firm's capital while keeping a majority share of the profits your strategy generates.

Kraken Funded works based on this model and allows you to trade with Kraken's money instead of your own if you are able to prove your trading skills during the evaluation phase.

But if you still need a deeper understanding of what a prop firm is, before you dive deeper into how they work, you can check out another guide that covers this concept from the ground up.

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Step 1: Pay the entry fee and start the challenge

The entry fee is what you pay to attempt the evaluation, and it is the only money you put at risk in the entire process. It is not a deposit and it is not the capital you will eventually trade. It is the cost of proving you have strong enough trading skills to be trusted trading the firm's capital.

Once you pay, the challenge begins. The firm assigns you a virtual account with a defined size, a profit target to reach, and a drawdown limit you cannot cross. From that point on, your job is to trade toward the target while staying inside the rules.

Step 2: Hit the profit target without breaching the drawdown limit

The evaluation stage has two conditions that pull in opposite directions. You need to grow the account to reach a set profit target. At the same time, you cannot let the account fall past its drawdown limit, which is the floor your balance is not allowed to breach.

Reaching a target is achievable if you are allowed to take reckless risk. That is why the drawdown limit exists, to ensure you are able to reach this goal without generating a significant loss along the way.

A firm is not really testing whether you can meet the price target alone. It is testing whether you can do so, while also managing risk.

In the end, traders who prove they can meet both of these goals also prove they have skills worth funding.

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What counts as a breach

A breach means your account has fallen past the drawdown floor, which results in the evaluation coming to an end.

Kraken Funded's drawdown floor is fixed at 3%. There is no separate daily drawdown limit, as is the case with some other prop trading platforms where a single bad day can end a challenge even if your overall account is still healthy. One fixed floor is simpler to track because it allows you to always know exactly where the line is.

Step 3: Get funded and trade with Kraken's money

When you pass the evaluation, you then have access to a funded account. This account allows you to trade the firm's capital, and the profits your strategies produce are shared between you and the firm, with the majority going to you.

The progression from evaluation to funded is the entire reason why the prop trading firm model exists. You proved the skill on the challenge and thanks to that, the firm supplies you and your proven approach with their own capital to trade.

Your personal downside risk is capped at the entry fee you already paid, while the upside potential scales with the effectiveness of your trading strategy.

On platforms like Kraken Funded, you can choose to take different evaluations, which allow you to access different account sizes. They also can have higher entry fees to take the evaluation, so it is important to find the right balance between which evaluation path has the evaluation fees and account size that fit your strategy.

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How the profit distribution works

An 80/20 share in the trader's favor is common, applied at the point you withdraw profits rather than on every trade. The mechanics of how shares are calculated, when they apply, and how withdrawals are processed get more detailed than this page needs to.

How difficult is a typical challenge?

The honest truth is that the evaluation phase is hard. This is a feature, not a bug.

That's because if everyone passed, the evaluation would prove nothing, and no firm would risk its capital on the result.

So approach a challenge as a genuine test of your trading skills rather than a formality or a paywall to click through. The traders who pass tend to be the ones who treat the drawdown limit as the real constraint and the profit target as the natural consequence of trading within it. Prepare accordingly, and the difficulty works in your favor rather than against you.

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How Kraken Funded works specifically

Kraken Funded combines the three-step model inside the Kraken app with a simple rule. There is one fixed 3% drawdown floor, no daily limit, zero trading fees across both the challenge and funded stages. Traders do not have access to leverage and all trades are limited to 1x exposure.

You can take an evaluation for three different tiers, which vary by account size, entry fee, profit target, and drawdown allowance. To see current plan details and choose a tier, start with the overview page.

Tier

Account size

Entry fee

Profit target

Drawdown

Starter

$1,000

$20

$120

$30

Mid

$5,000

$50

$600

$150

Anchor

$10,000

$90

$1,200

$300

Start prop trading on Kraken

You now know the three-step mechanics behind how prop firms work: entry fee, evaluation against a drawdown limit, and a funded account with a majority profit share. You also know why the challenge is difficult and how this makes the prop trading firm model work.

Kraken Funded runs this model inside the same app you already use to hold and trade crypto, with a fixed 3% drawdown floor, no daily limit, zero trading fees in both stages, and 1x exposure. Three tiers let you choose the account size that fits your goals.

Prop firms work in three steps. A trader pays an entry fee to attempt an evaluation, hits a profit target without breaching a drawdown limit, and then trades the firm's capital while keeping a majority share of any profits. The trader's own financial exposure is limited to the entry fee throughout.

Crypto prop firm challenges apply the same evaluation-then-funding structure to crypto markets. You pay an entry fee, then trade a virtual account toward a profit target while staying above a drawdown floor. Because crypto trades around the clock, there is no exchange calendar to work around, and crypto-native firms often keep the product simpler than leverage-heavy futures challenges. Pass, and you move to a funded account trading the firm's crypto capital.

Most challenges share three core rules: a profit target you must reach, a drawdown floor your account cannot fall below, and often no fixed time limit to get there. The exact figures vary by firm and by account size. Kraken Funded uses a fixed 3% drawdown floor with no separate daily limit.

Prop firm challenges are genuinely difficult, and most applicants do not pass on their first attempt across the industry. The difficulty is intentional: the evaluation is meant to verify real risk-management skill, which is why a funded account carries credibility. Treating the challenge as a serious skill test rather than a formality is the approach that tends to succeed.

After you pass, you move from the evaluation to a funded account, where you trade the firm's capital rather than a virtual balance. The profits your strategies generate are shared between you and the firm, with the majority going to you, typically applied when you withdraw. Your financial exposure remains capped at the entry fee you already paid.

There is usually no formal experience requirement to start a challenge; anyone can pay the entry fee and attempt one. In practice, though, challenges are designed to be difficult, so trading experience and disciplined risk management matter a great deal to whether you pass. The evaluation itself is the skill check.

This is an unregulated service. This evaluation program is intentionally rigorous and designed to verify a trader's risk-management skill and strategy discipline before any proprietary capital is allocated by Payward Oceanic Ltd. Most applicants do not pass on their first attempt and there is no guarantee that your performance will improve or that you will pass any future evaluations. Prospective traders should purchase an evaluation only if they are confident in their trading ability and knowingly accept the risk of not qualifying for a funded account. Evaluation fees are non-refundable for each attempt once trading begins, regardless of outcome.