Proprietary trading, also known as prop trading, involves a financial institution using its own money to buy and sell financial instruments like stocks, commodities, bonds, and derivatives. Instead of trading with the client’s money, a prop trading firm allows you to trade with the firm’s money. The goal of prop trading is to make a profit for the firm. Prop traders at the firm would get a percentage of the profits after earning through trading. But what are the advantages of joining such a firm?
Advantages of Joining a Prop Trading Firm
If you’re an experienced trader and you want to learn more or become more advanced, you can consider joining a prop trading firm. There are different advantages that come with joining a prop trading firm.
Access to Higher Capital
For one, you have access to more capital than you would have gotten as an individual trader. If you’re trading on your own, you might have to use your limited savings to make investments. But as a prop trader, you are trading with the firm’s money. Firms like OANDA Prop Trader can offer enough capital to start trading, allowing you to take larger positions and potentially make higher profits.
Lower Trading Costs
Being a high-volume trader can be very expensive, especially when you consider the fees and commissions you have to pay with online brokers. But if you’re a prop trader, you can enjoy reduced costs from the firm, including low commissions and top-notch trading platforms. All of these would increase your profitability.
Access to Better Tools and Software
Proprietary traders usually have access to more sophisticated software, data, and tools than retail investors. That’s because prop traders have all the advanced algorithms and technology that they need to analyze and execute trades, as well as manage their risks. These tools might not be available to individual traders.
Risk Management Policies
Prop traders also have very strict risk management policies, which are made possible by experienced investors and cutting-edge technology like algorithmic trading systems, AI-driven platforms, stress testing tools, trade surveillance systems, and high-frequency trading systems. Prop trading firms usually use real-time monitoring systems, multiple-factor authentication, intrusion detection software, and other encryption protocols for security.
There have been cases of prop trading firms being hacked, like Virtu, which lost a total of $7 million to hackers. After this case, Virtu had to implement better access controls, firewalls, encryption, security policies, and regular updates. Since the firm is focused on protecting its capital, you can focus on your trading activities without having to worry about managing risk. Having risk management policies in place helps traders prevent losses in the long term.
Collaborate with other Traders
Unlike retail trading, where you do everything on your own, prop trading allows you to connect with other investors. Collaborating with other investors can lead to the sharing of ideas, insights, and strategies. This would help you learn from other experienced traders. If you just join the prop trading firm, they usually have a team of professionals who can give you guidance and support.
Education and Mentorship
Prop firms pay close attention to traders because they can only profit when the trader succeeds. Individual success adds up to the entire firm’s progress, so they invest heavily in education and support their traders in learning skills. Prop traders usually hold seminars and mentorship programs for traders to learn and become more experienced.
How To Become a Prop Trader
If you’re already experienced in trading, you can work towards becoming a prop trader. You don’t need any special qualifications as long as you have a profitable trading system, reliable risk management skills, and you can master your own emotions during stressful times. Every prop firm comes with different programs that you can go through to qualify for the capital.
To become a prop trader, the first thing you should do is research some of the top firms. Check out their terms and conditions and their user reviews. Look out for credible and transparent firms that have been licensed under a regulatory authority. You should also find out what other prop traders from the firm are saying.
You don’t need to get a degree to become a prop trader, although having a level of education in high finance or advanced math can be helpful. You should also have certifications in financial analysis and risk management, such as a chartered financial analyst. However, the main thing is to be experienced in online trading, have the right skills, and follow strategies.
If you get accepted to the prop trading firm, expect to go through a trader-in-training or internship program before you’re left alone to trade independently. Ask about these programs to find out if they’re a good fit for your trading goals. Every prop trading program will offer a trading simulator or paper trading to help you learn without using real money.
As a prop trader, if you propose good ideas and build a track record of profitable trades, you will be able to advance in the firm. Prop traders usually consider industries like the technology, energy, healthcare, financial, and retail sectors. But if you don’t make positive trades, you’ll run out of buying power. To achieve success as a prop trader, you should use technical charts, fundamental and sentiment analysis, market scanners, and algorithmic tools in all your decisions. These analysis tools are designed to process important data that can often make or break the trade.
Prop Trading vs Traditional Trading
The main difference between prop trading firms and traditional trading brokers is the source of the funds. Traditional brokers usually get capital from their clients and then invest on their behalf. Meanwhile, prop trading firms use their own capital for trading activities. In some cases, they sell the financial products to clients.
With traditional trading, you need to sign up with an online broker to get started. These brokers usually have basic tools to help with your investments. Meanwhile, prop traders get access to high-quality software and advanced tools.
As for the profit, prop traders can enjoy a percentage of the net profit. Meanwhile, individual investors can get 100% of all the profit after paying all the fees. But that also means that if there is a loss, the retail investor still has to pay fees.
Getting Started With a Prop Trading Firm
With all that has been said, you might be wondering whether prop trading is a good option. Although it’s not easy to engage in proprietary trading, it can become a lucrative career for anyone who is willing to acquire the right skills. With prop trading, you get access to high capital, lower trading costs, advanced software, and the opportunity to collaborate with other traders.
