Enterprising traders looking for a lucrative career in the trading world have most likely heard the buzz about proprietary trading. In this extensive beginner’s guide to proprietary trading, we will explore all aspects, the pros, and cons of prop trading jobs at a prop shop. Prop firms or prop shops as they’re commonly known are one of the hottest things in trading right now and for good reason. Proprietary trading firms have one goal of becoming profitable in the long term. There are no customers to make happy and the firm supplies traders with all of the cash required for trading.
These two simple concepts comprise the core of the flexible and lucrative world of proprietary trading and open it up to high levels of profitability and freedom. There is no risk of losing your own capital and trades can be made wherever, whenever.
Depending on the prop fund in question, there are varying requirements for membership. There are prop firms in which you need to pass an evaluation in the first stage, there are prop firms in which you trade on a demo account at the beginning, and there are prop firms that let you trade on a real account right from the beginning, meaning instant fundingת Some companies even offer a growth plan to profitable traders.
Proprietary funds are a very attractive option for skilled traders who are looking to leverage their knowledge, move away from the office environment, and trade from the comfort of their own homes.
As we briefly touched upon in the intro, proprietary trading is where trades are made with the firm’s capital, instead of on a client’s orders against commission payments. This means the firm leverages the prop trader with more trading capital to maximize their returns.
A big benefit for beginners is that access to the fund is not limited by an applicant’s financial situation. If you’re just starting out, you do not need to have a lot of capital on hand if you want the chance to work at a major proprietary trading firm. On top of the reduced risk to individual traders, most proprietary trading firms will protect traders from massive losses by limiting the capital drawdown according to the fund’s risk tolerance.
A long time ago (30-40 years ago), in a market far away, prop trading existed but looked very different from how it looks today. In those days, connecting to market exchanges required you to be a member of the exchange. Retail trading didn’t exist, therefore investors could only participate in the market through an intermediate exchange member, such as banks or a licensed equity manager. If you are an experienced or a beginner trader and wanted to be a professional trader you had to be employed by one of the exchange members.
One of the employment models available at the time was indeed proprietary trading. In that older model, a trader would rent a seat at the institution, and contribute their own capital to cover any possible risks to the fund. In return, the fund would give the trader access to trade the market through their exchange membership using the firm’s pool account.
These early prop firms were celebrated for the opportunity they were giving out and in turn, received a steady flow of enthusiastic talented traders ready to trade for them. To attract even more talents, the funds made more attractive prop deals for the outperformers, offering more of the firm’s capital to be traded and increased shared revenue deals.
About a decade before the internet was introduced, prop trading firms were everywhere in the major financial capitals. Traders who felt confident enough would have migrated to the skyscrapers of these urban wealth centers in order to make it as independent prop traders. There were no guarantees then, only the hope of a vacancy on the firm’s pit floor and a lucrative compensation deal.
Soon after this model was introduced, anyone could trade with the assistance of a banker, but the true advantages of leverage and of trading in a professional atmosphere surrounded by a dedicated knowledgeable team were only to be found in those early trading rooms.
When the internet exploded, private brokerage firms popped up like mushrooms after the first rain, and like in so many other fields, changed the industry’s pivot focal point. Trading from anywhere was now possible, along with higher leverage, short selling, and limit and stop orders – all just a click of the mouse away. The prop trading model even branched out with newer and updated business models that suited the new technology. For the first time in history, any trader could work full time or part-time for a proprietary firm from a remote location thanks to the internet.
A trader can now seek out prop trading companies working mostly on futures commodity trading, Forex trading, Index trading, and so on.
Over the past couple of years, many forex traders have fled retail brokers, becoming independent traders with forex prop shops.
Luckily for traders, there are a few types of prop firms available. Depending on your strengths and weaknesses, with a bit of research, it is possible to find the right one to suit your needs.
There are prop funds that are quite restrictive while others allow their traders more freedom. If you know and understand your trading personality well, it should be easy to figure out which system you might thrive in while which system will be a setup for failure.
While individual firms will differ in levels of freedom, there are general guidelines that apply to all funds. If a trader does not follow these universal rules, they will be warned or removed from the fund as quickly as they were brought in.
In addition to knowing your trading personality and trading statistics very well, whenever you are considering any prop firm, use the following list as a guide for proprietary firm’s features and their meanings.
Demo vs Real account – There are firms where your evaluation is on a demo account before you are funded, and there are firms in which your evaluation is on a real live account, meaning you are funded from the first moment, if you are profitable you will receive money faster.
Trading market – what does the fund specialize in? Are you more adept to trade Forex, Futures, Stocks, or Options?
List of tradable assets – Check to see what is and what is not allowed. Take note of the restrictions and determine whether or not you will be able to follow the rules and perform well within their limits.
Trading hours – what are the active trading hours? Are there inactive mandatory times such as during economic releases, major news events, etc.?
Holding positions overnight and over the weekend – Some firms require a flat portfolio by the end of each trading day. Such funds are restricted to day trading methodologies only while other funds will allow overnight trading with or without certain restrictions. If you tend to run with trades longer, make sure it is allowed in the firms you’re interested in joining.
Trading the news – There are firms that do not allow trading the news, pay attention to this, especially if you are a swing or long trader, or if you use strategies like Set & Forget.
Trading costs and structure – What are the spread costs and commission rates? Are there any other costs, for platform and market access? If so, you need to consider and calculate how much will it affect your profitability.
Profit payout – Do payouts have a clear schedule? Is there any minimum amount that needs to be reached for a payout? What are the transaction costs, if any?
Profit split – Most prop firms pay only by the trading net profit performance and usually they set a split agreement by the percentage of the profit. Some funds give a higher percentage to the traders, however, a trader needs to ask not what the percentages are but what is the profit potential in actual money? This can be confusing as the percentage split doesn’t necessarily reflect the actual potential earnings. Do your homework and don’t accept it as being as straightforward as it seems.
Profit payout vs growth – When getting paid, is the payment being deducted from your milestone? Some firms will require their traders to decide to let it grow or to get paid, while other funds (like the5ers) allow for both.
Growth Milestones – Does the fund layout a clear plan for growth milestones? Do you know how much and when the fund should grant you more trading capital? How far can it go?
Leverage or buying power – How much buying power does the fund let their traders work with? All funds cap buying power, but there are a few different methods being utilized. Some funds cap the running positions, while others cap the total daily trading volume. Make sure the firm cap policy suits your trading frequency.
Maximum loss / daily loss – All firms restrict maximum loss and some also enforce daily maximum loss. This is almost a good thing as most traders fail to stop when hitting a bad sequence of losing trades. However, when you evaluate a prop fund, check to see that you can tweak your trading risk to meet their requirements and ensure you have a proper margin to trade efficiently within this boundary.
Other risk parameters and program requirements – Each program has unique and specific requirements and features that you will have to check out and make sure you are aware of and ready to perform under these specifications.
Qualifying requirement – Most online prop firms will have a certain testing procedure. Usually, firms do not care for your past performance, instead stating that whenever you feel ready, to come over and get tested for entry. Most qualification procedures involve real-time trading phases where the trader is expected to perform under various market conditions, applying strict risk management guidelines and hitting goals and objectives.
Most qualification procedures are conducted on demos or simulators, with very few funds letting traders take their tests in real trading money accounts. The testing phase may last a while and most funds have minimum time and a number of trades count before they can decide if the trader is capable of managing their capital in a responsible and professional manner.
Participation costs – All online prop funds require a signup fee. This is to cover their costs for the qualification procedure and also to filter out non-serious traders.
There are three types of participation fees. Subscription, Deposit Securities, One Time Entry Fee.
The first is by subscription, where as long as you are in the program you pay a monthly fee to participate.
The second type is paying an upfront deposit. This applies mainly to big old-school prop firms where the trader has a segregated account in the fund which the fund observes in order to decide how much they wish to add or to buy with the trader.
The third kind of cost model is a one-time fee. In this setup, traders pay once to cover the main costs of the evaluation phase and once the trader had proven to be profitable and responsible for risk, there will be no further participation cost requirements.
Trading education plan – Some funds require you to trade using their own trading strategies. Because these strategies will be unfamiliar when you first join, you will have to take their education course before starting your trading qualification phase. This is a good solution for beginner traders with less experience and high enthusiasm for the trading profession. For experienced traders, if a fund suggests an education, it might be a sign they are looking for executionist traders for their own strategy, not yours.
Advanced dashboard – It is very important that the funding company has a quality dashboard, not only do you know where you stand, but also you can generate insights from the dashboard statistics.
Trading resources – There are firms that give you additional resources, such as online one-on-one meetings with an expert forex trader, a live trading room that you could watch experienced traders, or even a free course to help you succeed.
The5ers created the first advanced trading course for prop traders to build a solid trading base, to develop a solid trading plan, to assist traders to adapt their systems to the5ers parameters, to show different risk techniques, and to help to improve the right mindset and psychology when trading.
The course is free for anyone who trades with The5ers, Here’s a glimpse of what awaits you in the course
We hope this guide to proprietary trading firms will give you a clear view of how to assess a prop firm that suits your goals, skills, and needs. As we explained earlier, prop trading funds have gone through many changes over the years. From the floors of established banks to the comfort of a high-quality home office, today any experienced trader can develop a trading career for a fund while trading risk-free (once qualified), with high buying market power, and with fast growth potential. While there are a few models of prop trading programs, they are all about funding the best and most talented traders. Your job is to find the one that suits your skill level, your goals, and your trading styles.
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