In many professions, you get paid for your time. Getting an hourly job can be a great way to turn your life around if you’ve ever been unemployed.
In short-term trading, you get paid for smart trades, but there’s a caveat: you must have the capital to complete a transaction. You have to buy an asset if you want to sell it later.
Some view this as proof that “you have to have money to make money,” especially if they want to argue that short-term trading isn’t a viable career.
Retail traders indeed use their own money to make trades. Many platforms will even allow you to buy a fraction of a share, meaning you can start with just USD 1. But making a living as a trader by starting with one dollar is like trying to start a farm with a single seed of corn or wheat. It’s theoretically possible; it will just take a very, very long time.
On the other hand, if you don’t know anything about farming, all the seeds in the world won’t make you rich.
A short-term trader needs skills and buying power if he or she wants to make a living.
And that’s where a prop (“proprietary”) trading firm can make all the difference. A prop trading firm will equip you with the skills, technology, and buying power to beat the markets and pay your bills.
In this article, we’ll explain how prop trading works and how you can use it to become the professional trader of your dreams.
Table of Contents
What Is a Prop Trading Firm?
The “proprietary” part of the name comes from the trading hardware and software the company offers to its traders. Many trading platforms are available to the public, which has fueled massive growth in a category known as “retail trading,” which we’ll cover in the next section.
Prop trading firms develop unique hardware and software solutions to give their traders a competitive edge. This is especially important in areas such as data analysis and direct market access. Although the fundamentals of the trading tools on offer will be similar, not all prop firms are created equal.
Another defining characteristic of a prop firm is the capital or “buying power” it provides to each trader. In some cases, this can be as much as USD 50,000-400,000, depending on a trader’s performance and qualifications.
This fund represents the money that a trader can use to execute trades. It is not a bank account they can draw from or borrow against. It’s not the same thing as leveraged trading, although prop firms may also facilitate leveraged trades for qualified traders.
In exchange for using the firm’s money to make trades, traders agree to share the profits. Usually, the profit split is between 50-80%, with some firms going as high as 90% for certain assets.
The best prop firms shoulder 100% of the losses and use safeguards to prevent individual traders from losing everything. They do this to allow traders to focus on making smart trades with acceptable risk levels. If you’re stressing about every dollar that you lose, you won’t take enough risk to make a significant profit.
Prop trading firms vet and train new traders to ensure the highest chance of success. They offer comprehensive training certifications and communities where new traders can find camaraderie and mentorship.
People who partner with prop trading firms are often called prop traders or short-term traders.
Thanks to the support of the prop firm, prop traders are better positioned than retail traders to use advanced trading strategies such as:
- Arbitrage
- Scalping
- Trend Trading
- Momentum Trading
- Reading the Tape
This is a small sample of the many trading strategies used by prop traders. There isn’t a “perfect” trading strategy. The best traders explore many strategies, discover the ones they prefer, and master them.
The Advantages of Working With a Prop Trading Firm
Institutional investors are the “old guard” of the trading world. They work at investment banks or firms, executing trades on behalf of a group or institution. They have the agency to execute trades as they see fit, but they are highly accountable for the returns they generate.
On the other hand, prop traders have far more freedom, independence, and earning potential than institutional traders. Here are some of the major benefits of partnering with a prop firm:
1. Low Upfront Capital Requirement
Because prop firms are looking to recruit and train highly talented or skilled traders, they don’t require a large upfront deposit from would-be traders. Often, they require traders to complete a training program or prove their abilities in a trading simulator.
Once you’ve proven that you can execute profitable trades, the firm will provide you with a funded trading account to begin live trading.
2. Access to More Buying Power
Very few people can access tens of thousands of dollars to begin their trading career. At Real Trading, we start most traders with a USD 50,000 trading account and may provide as much as USD 400,000 for Forex (foreign exchange) trading.
Prop firms can also provide leverage trades via their broker. When traders use leverage, they borrow money from the broker to execute the trade. This allows traders to magnify their buying power but creates the risk of losing more money.
3. Direct Market Access (DMA)
Some trading platforms and retail brokers build their systems with a deliberate price action delay. This means that the price you see may not match the actual price. The broker or platform provider can use that delay to their advantage and your loss. Regular brokers like Robinhood, Fidelity, and Schwab do not provide DMA.
The best prop firms offer DMA and allow you to select your own market maker–a firm that provides liquidity to the market–giving even more control over your trades.
4. Team Environment
If you’re not commuting to an office daily, trading can feel like a lonely profession. This can lead to burnout and poor trading performance. It’s better to trade with a team.
As part of a prop firm, you have access to a community of like-minded traders who are working with the same tools, tech, and markets. Many traders are extremely competitive, but prop traders aren’t in a zero-sum game for bonuses or promotions, so there tends to be a freer exchange of tips and ideas.
5. Education and Mentorship
Except for the shady ones, prop firms only make money when their traders succeed. They invest heavily in education and supporting skill acquisition for their traders.
Prop firms will ask their top-performing traders to hold training seminars and mentor new traders. This means that prop traders learn from some of the most experienced traders in the world.
6. Prospects for Full-Time Trading
Prop trading is a meritocracy. If you learn the foundational skills and practice a disciplined trading strategy, you can turn short-term trading into a full-time career. There’s no office politics or bureaucracy to navigate. Make smart trades. Take home the profits. Wash, rinse, repeat.
How to Get Started as a Prop Trader
There are lots of prop trading firms to choose from. Some of the popular ones include the 5%ers, FTMO, The Funded Trader, FXIFY, Trade the Pool, and Real Trading.
To become a short-term trader with a prop firm, you should follow these steps:
1. Research Firms
The first step you should take is to make a list of top firms that you’re considering and create a list of pros and cons for each one. Read their terms and conditions and their user reviews.
Some firms are designed around a “pay to play” model where you can unlock buying power by depositing additional money with the firm. Of course, your deposit helps the firm protect against losses, but that just means you’re shouldering those losses in advance. This approach favors people who already have expendable income to use for trading.
Other firms, such as FTMO, prefer a lengthy evaluation period to weed out everyone but a select few traders. Still, other firms present as “prop” firms, but really, they’re funded trading firms–where you take less profits and shoulder all your losses–stay away from these firms.
Look for firms that have strong credibility and are transparent about the regulatory authority they are under. If possible, speak with employees of the firm as well as other traders. Remember, you’re interviewing them as much as they’re interviewing you. Prop firms are looking for high-quality talent–that’s you!
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2. Education and Trading
While you don’t need a degree in high finance or advanced math to become a prop trader, that level of education can provide a helpful foundation. Some people who do get those degrees go on to work as institutional investors.
Certifications such as a Chartered Financial Analyst (CFA) or Financial Risk Manager (FRM) can enhance your industry knowledge and credibility, but they’re not a requirement for prop trading.
In the world of prop trading, nobody is checking your diploma. Prop firms want to know if you’re smart and self-motivated enough to acquire the right skills and follow disciplined strategies.
There are lots of online courses where you can learn the skills and strategies of short-term trading.
3. Practical Experience
Prop may offer internships or trader-in-training programs to give you hands-on experience before you start trading on your own. Inquire about these programs to learn if they’re a good fit for your goals.
Every prop trading program worth its salt should offer paper trading or a trading simulator where you can learn the trading platform and conduct trading activities without using real money. Once you’ve completed your initial training, you may be required to prove your trading prowess in a simulator.
Trading simulators aren’t just a tool for evaluating new traders. Experienced traders use trading simulators to test new strategies, backtest theories, and study market behavior in a zero-risk environment.
4. Career Growth
As we said earlier, short-term trading is a meritocracy: if you have good ideas and can demonstrate a track record of profitable trades, you’ll go far. On the other hand, if you repeat the same mistakes without learning and improving, you’ll eventually run out of buying power.
Becoming a professional trader isn’t a function of reading blogs, watching videos, listening to podcasts, and chatting on forums with other traders. Chasing information is something that new traders do because they believe it will give them an edge. Experienced traders know that success comes from developing and following your trading strategy and risk management plan.
That said, building relationships with other traders, especially traders who are more experienced and successful than you, can accelerate your career. Keep a humble attitude, ask questions, and take action when a mentor offers you feedback.
And keep a trading journal! Professional traders document every trade and make notes about their strategy along the way. This is a major differentiator between amateur and professional prop traders.
Prop Trading vs. Other Types of Trading
Prop trading is a type of short-term trading where trades are entered and exited within the same trading day. Traders who hold onto assets for weeks or months are called swing traders, while traders who hold onto assets for years are considered long-term investors.
There are many ways to engage in short-term trading. Prop trading is just one approach.
Prop Trading vs. Retail Trading
Retail trading is the most popular method of investing in stocks, commodities, options, futures, bonds, and cryptocurrency. Retail traders create accounts with brokers such as Robinhood, Charles Schwab, and FxPro and then conduct trades through the broker software platform.
Retail trading usually has zero commission fees, meaning that there isn’t a base cost to submitting a trade order (historically, brokers earned commissions on individual trades). You start trading with your own money and stop trading when you’re happy with the results or run out of money.
According to Morgan Stanley, retail traders are responsible for 10% of all market transactions.
Usually, retail trading tools don’t offer DMA or many of the advanced tools and features that prop traders enjoy.
Most prop firms prefer their traders to use the firm’s account so the firm makes money. On the flip side, prop traders aren’t responsible for their losses.
Prop Trading vs. Institutional Trading
Institutional traders work on behalf of a firm as an employee. They usually take a salary and are paid additional bonuses for exceptional performance. Institutional traders manage money provided by people or organizations.
There are six main categories of institutional investment firms:
- Endowment Firms
- Commercial Banks
- Hedge Funds
- Pensions
- Mutual Funds
- Insurance Companies
These firms can trigger huge swings in the market as they command trillions of dollars and are responsible for 90% of daily trading volume.
While prop traders have much more buying power than the average retail investor, they can’t hold a candle to multi-trillion dollar firms such as Blackrock. Institutional investment firms only accept highly qualified candidates, and they often use advanced trading techniques such as quantitative trading and algorithmic trading.
Prop trading firms may not command trillions of dollars in buying power, but they provide career opportunities to anyone who can prove they have the drive and skills to beat the market.
FAQs
1. Is prop trading worth it?
Yes. Although prop trading isn’t considered an easy way to make money, it provides a lucrative and fulfilling career for many people. If you’re willing to acquire and master the right skills, you can make a profit as a prop trader.
It’s a fast-paced working environment that rewards boldness and dedication. If that sounds like your type of job, then prop trading might be a good fit.
2. Is prop trading illegal?
Prop trading is simply a form of short-term trading. It is legal in almost all countries, including the US, Canada, Europe, India, and China.
However, financial markets are heavily regulated and you could conduct illegal activity if you’re not careful. Be sure to research the regulations that apply to your country of citizenship or residence and comply with them—keep in mind that these regulations may change.
3. Is prop trading risky?
Trading assets such as stocks, bonds, options, futures, commodities, and cryptocurrency is fundamentally risky. It would be difficult to make a profit if there wasn’t any risk.
Learning how to manage that risk and minimize losses while maximizing gains is possible. Even the best traders expect to lose money 40-60% of the time.
4. How are prop traders taxed?
Taxation differs by country. Typically prop traders are only taxed on their profits, meaning you can deduct your losses. You should research the tax laws that apply to trading in your country of citizenship or residence.
Real Trading Is a Prop Firm You Can Trust
As technology has advanced, more people have access to trading tools and knowledge than ever before.
This brings a lot of scammers and people selling get-rich-quick courses on trading. They may even offer to show you their profit and loss statements to prove their success. Beware! There are ways to spot frauds before they take your money.
At Real Trading, we’re a prop firm that has been around for more than ten years. Our platform powers more than USD 3 billion in daily trades from more than 3,000 traders worldwide.
We’ve developed a comprehensive training program that equips you with the foundational skills every short-term trader needs. Once you’ve earned your certification, you can jump into the trading simulator and prove you’re ready for a funded account.
Once you’re trading on the live market, we split the profits and you get to keep up to 90%–and you almost never pay for your losses. The better your trades, the more buying power we give you, which enables you to earn more money faster.
Our system is proven to help people achieve their dreams of financial independence as professional traders. We’re always looking for smart people hungry to learn short-term trading. Are you ready to start your dream career?
