Are funded trader programs a scam?
I would say that overall the funded trading program industry is the latest in a long line of ways that would-be traders are being scammed. Over the two decades I’ve been involved in trading I’ve seen all sorts of scams and selling the dream of becoming a funded trader stinks.
What is a funded trader account?
A funded trader account program works by giving people the chance to trade with other people’s money. You pay to take a challenge, which will be trading on a demo account with a small amount of money. If you make money or “pass the challenge” you move on to the next level, which is either a cash reward or a profit share when prop trading.
You have to pay for these challenges, which you do not get back. The ultimate goal is to prove to the prop firm (or funded trader program) that you always make money and are trusted to trade with a larger amount of money and taking a percentage of the profits you make.
How funded trader program scams work?
In most cases, you will never be trading real money. You may pay $100 to take a trading challenge and then, trade on a demo account with a $100 value. If you make money, you may be offered to pay for a larger challenge say $500 before you can get a profit share. Trading is very hard, particularly for day traders who are just starting out, so chances are at some point you will fail a challenge before you get a chance to trade real money.
The scam works by selling the dream that trading is easy and anyone can make money.
Funded trader programs as particularly easy to set up as prop firms can just license the software of a trading challenge and start taking entry fees.
Are funded trading accounts legit?
No funded trader accounts are not real accounts. They are demo accounts where you are not trading on legit markets. You are trading on fake prices that closely mirror the underlying market. Some even let you trade when the real stock markets are closed, on synthetic indices, which are completely made up.
That’s not to say that all weekend trading is pretend. For example, IG lets you trade some markets on the weekend. This is quite a helpful way to manage your risk and open or close a position if there is some economic news out on a Saturday or Sunday. But, as there is virtually non-existent liquidity, prices are wide and are an indication of where the real market may open at best.
Funded trading accounts have been around since trading first started and are essentially what hedge funds have grown into. That is all a fund manager is, a person who has proved themselves to be a trader with a good track record and therefore trusted with other people’s money.
One of the key indicators that make funded trader programs ripe for scammers is that they are not regulated by either the SEC in the US or the FCA in the UK. This means there are no rules on marketing, advertising, or treating customers fairly. Unregulated trader funding platforms are normally based off-shore and essentially, charge you for trading on a demo account.
The sad truth though is that this is partly the regulator’s fault. By being to slow or refusing to regulate new markets or types of trading they leave people wide open to being scammed. If funded trading programs were regulated by the FCA as a financial product, they would be safe and fair for people to use.
Can you make money as a funded trader?
Here is the rub and where the scam really comes into it’s own. You can actually make money as a funded trader. By either passing lots of channels and getting a fixed pay-out or by being a constantly profitable trader and getting a split of the profits you make.
It’s quite similar to the eToro money-making model, where if you are a good trader and you can prove it you can make money for both yourself and other people. But as with everything in trading, I’m afraid the majority of people lose money if they don’t know what they are doing and just chasing dreams.
There have even been examples of funded traders, making millions of pounds from their bedrooms, a great example is the Hound of Hounslow, but he’s now in jail in the US for market manipulation. If you want to know more about that read Flash Crash. It’s a great book, that can help you understand how the internal mechanics of day trading and professional prop firms operate.
Social media success stories
Social media has been the largest perpetrator of investing and trading scams since internet forums as it’s is a largelly unregulated advertising platform. When researching this article, my Instagram and Facebook feeds are not almost entirely populated with people sat in front of desks telling you that whilst “all other funded trading programs are a scam ours is not” and with glowing testimonials from people who have made money.
It’s classic Ponzi scheme stuff. Let a few people make money and get them to sing your praises, whilst relieving the other 99% of those who try to become funded traders from their money.
I have been saying for years that social media platforms particularly in the advertising space need tighter controls and regulations. The regulators have tried to get involved in the daftest way possible, by spending money to advertise on these platforms, but what they actually need to do is start fining them. Taking money away from them for bad practice, rather than contributing to their profits!
The reality is though that, it’s just a game, a bit of fun, and a way to lay about imagining you can be a hedge fund manager by only risking $100.