A foreword on prop trading
The steps to trading with a regular retail broker are relatively simple; you register an account and deposit into it. The account balance is immediately tradable in the live markets. No one dictates what you trade or how you trade – whatever you earn is yours to keep and whatever you lose is yours to bear.
With a proprietary trading firm, the mechanism is slightly different. You register for an account, but the account is not funded with your money. Instead, the prop firm provides funded trading accounts to traders who successfully pass the firm’s evaluation. The evaluation consists of a specific profit target to be met (on a simulated account) without exceeding losses beyond a given threshold. Those who complete the objective are granted funded trading accounts, and any potential profits generated moving forward are split with the firm. The evaluation incurs a fee that is proportional to the final account size.
Here are some common misconceptions held regarding the prop trading industry:
1. Prop trading is only for professional traders
In the past, this certainly used to be the case because investors would only entrust their capital to certified hands. However, under the modern “evaluation” model, anyone can participate since the evaluation provides the certification, and the evaluation fee, though substantially smaller than the funded trading accounts, offsets risk to a degree.
2. Prop trading favors scalpers and day traders
This perception exists because many prop firms do not allow holding positions over the weekend and trading around big news announcements. Naturally, these restrictions feel alienating to swing traders and news traders. But plenty of prop firms make it possible for both styles of trading, either through providing additional account options or by not prohibiting them to begin with.
For example, Ultimate Traders does not prohibit trading news announcements and provides the add-on option to keep trades open during weekends.
3. You’re better off trading your own money
This sentiment usually stems from the disappointment of stumbling at the evaluation and not progressing to the funded stage. Many traders feel irritated losing a fee on a demo account. They believe the money would have been better spent on a real trade with a real chance to earn. However, the fact remains that the trade would still have been lost, and almost certainly for a substantially larger personal investment. Consecutively failed challenges should serve as blessings in disguise, alerting traders to the likelihood that their strategy needs to be tweaked before re-entering the market.
The other point to this argument is that trading your own money means no obligation to share profits. However, the modern prop firm’s split is so high (up to 90% in some cases) that the difference is almost negligible when coupled with the benefit of receiving funded trading accounts without the risk of personal ruin.
4. Prop trading is unsuitable for crypto
This argument is routed in the fact that crypto spreads are notoriously wider than spreads of other trading instruments. So, technically speaking, the prop trader will automatically move closer to the drawdown limit upon opening a crypto position compared to other assets. But is there a reason to fear this?
Although crypto spreads are indeed wider than most, it’s not enough to put a significant dent in the available drawdown margin. What might prove more difficult is the volatility of this instrument class. However, volatility works both ways and crypto traders will be aware of this nature and associated risks and benefits. Accurately calculated stop-losses will be critical to not breaching drawdown.
5. Drawdown rules are a setup for failure
Drawdown rules exist in every prop firm for a reason. Having drawdown limits is the only way to separate methodical traders from haphazard traders. There’s endless theory behind trading but ultimately, prices either move up or down, so even if blindly guessing, the chance of guessing a binary result correctly is 50/50. Without drawdown limits, the in-between price fluctuations can be absorbed, and traders using large enough position sizes would only require a handful of attempts to reach a 10% profit target. Most self-funded traders don’t adopt this approach because it would be far too costly and risky, but when only an evaluation fee is at risk, there is not much to worry about. This is why drawdown limits are a crucial line of defense for prop firms since they vastly reduce the opportunity for guesswork.
Summary
Ultimately, prop trading is not inherently trickier than regular forex trading. It’s unlikely that a good retail trader will not make a good prop trader or that a bad trader will suddenly become a prop trading guru. Both avenues have the potential to be profitable with pitfalls along the way. The common denominator to success in both industries is knowledge.
