Prop trading (proprietary trading) has gained significant attention in recent years, providing traders with access to significant capital in return for giving a portion of their profits. But are prop firms really worth it? In this article, we will dive deeper into the details to understand what prop trading is, how it works, its costs, potential profitability and if this path is good for you.
What is Prop Trading?
Proprietary trading, or prop trading, is when you trade financial instruments using a firm’s capital instead of your own. Traders then pay a cut of their profits back to the firm. Prop firms offer aspiring traders access to more significant capital, advanced technology, and professional mentorship. They cover various markets, including Forex, stocks, futures, and cryptocurrencies.
How Does Prop Trading Work?
The Evaluation Process
If you are interested in joining a prop firm, most firms require that traders complete an evaluation to show off their abilities. This tends to involve trading via a demo account under set criteria both like making/losing profit without hitting full stop loss.
What Happens After the Evaluation Process?
When a trader graduates the evaluation, he becomes eligible to receive live capital. Since at this point, remote traders have the opportunity of working in real market conditions for which they use their firm capital and strictly control their risk management. Traders that have consistently shown themselves to be profitable traders can gain more capital allocation.
Payout Policy
Many prop firms offer a profit-split which is a good way to go with which traders towards getting the 80-90% profits. However, the payout structure can vary, and traders should be aware of any minimum withdrawal limits or payment schedules before joining.
Which Markets Can You Trade with Prop Firms?
Most prop firms allow trading across multiple markets just like normal forex brokers, including Forex, commodities, indices, stocks, and futures. This diversity offers flexibility to traders, enabling them to select the assets that best fit their trading strategy.
What are the Costs of Prop Trading?
Prop trading firms charge a fee for the evaluation phase, typically between often between $100 to $500 depending on firm and average account size. Some firms may also charge monthly platform or data fees. These upfront costs are usually considered minimal compared to the capital provided once the trader is funded.
How Much Money Can You Make in Prop Firms?
Profit Sharing (Typically 80-90%)
A high-profit split is one of the major benefits to prop trading. About 80-90% of these profits are given back to the trader and the rest is retained by the firm. E.g., if a trader makes $10,000 in profits and has an 80% profit split they will receive $8,000.
Unlimited Earning Potential in Prop Trading
Prop firms offer so much capital that a trader can make well over $1000/day or more with very little actual money of their own on the line. But if traders respect the risk plan they can keep upping their account size meaning increasing your earning potential.
Can You Lose Money in Prop Trading?
Traders do not expose their own capital to market risk, though they can still lose their funded accounts if they break the firm´s risk management guidelines. To give an example, breaching the maximum drawdown or daily loss limits will result in suspension of their trading rights.
Pros and Cons of Trading with a Prop Firm
Advantages of Prop Trading
- Low Upfront Capital Requirement: You only pay for your evaluation, which means far less of a financial risk to yourself.
- Access to More Buying Powe:r Prop firms grant access to large amounts of capital, so traders can make bigger trades and potentially earn greater income.
- Direct Market Access (DMA): Prop firms may offer more advanced trading platforms and technology as well as direct market access.
- Education, Mentorship, and Community: Most prop firms have some kind of training or mentoring available to help traders improve.
- Opportunity for Full-Time Trading: Prop firms can offer a consistent avenue to full-time trading for traders who consistently make money from them.
Disadvantages of Prop Trading
- Risk of Losing Capital: If a trader breaches the firm risk rules, they could be restricted from trading their own capital.
- Strict Rules and Evaluation Periods: Making it through an evaluation is hard enough without punishing rules.
- Profit Sharing with the Firm: This is a bit of a give and take one as you have always got to share your profits with the firm even though this profit split should generally be decent.
Prop Trading vs. Other Types of Trading
Prop Trading vs. Retail Trading
Retail traders are using their own money, so they have to try and preserve it and can only trade with a limited amount of capital. Contrast this to prop traders who use the firm’s capital and can put up more size which can lead to greater returns at risk. Retail traders can even go beyond that, whereas prop desk traders are confined to play by the firm rules.
Prop Trading vs. Institutional Trading
In its simplest definition, institutional trading is when someone trades for a large financial institution (eg bank or hedge fund), and where the traders have access to huge capital however are heavily regulated. Prop traders on the other hand, operate individually usually from home with a prop firm as support. The primary distinction is that institutional traders are employee whereas prop traders can be considered independent contractors.
Should You Use a Prop Firm or Opt for Higher Leverage?
For traders who lack the personal capital to make substantial trades, joining a prop firm offers a practical solution. Higher leverage accounts provided by brokers can also allow traders to access more capital, but they involve risking personal funds. Prop firms reduce personal financial risk while providing access to substantial buying power, making them a more appealing option for many traders.
How to Get Started with Prop Trading
Researching Prop Firms
You have to do your research first before you join a prop firm. Avoid companies that have hidden review procedures or unfavorable profit shares, these are signs of malicious brokers. We will be looking at popular prop firms such as FTMO, FundedNext, Top ONE Trader and My Funded FX.
Gaining Education and Experience
A lot of prop firms have a teaching aspect to their platform, but, ideally traders should already know most of the basic concepts as they begin the evaluation process.
Practical Trading Experience
So you need to have a history of profitability in demo or live accounts before joining the prop trading programs.
Career Growth Opportunities in Prop Trading
Top performing prop traders may see increased capital allocation, more resources and even larger account management within the firm.
Conclusion
Are prop firms worth it? Prop trading can be a great opportunity for experienced traders looking to trade with capital, while avoiding the risk of their own account. In return, it has access to massive amounts of funding, professional support and high cash revenues. Yet, traders also need to be disciplined, follow risk management regulations and go through reviews. If you have the discipline and the skills to trade well, prop firms can be an attractive avenue toward this independence.
