What is Prop Trading and How to Succeed in it?
Learn what is prop trading and explore proven strategies for achieving success in the competitive world of proprietary trading.
Let’s say you’ve been trading alone for a while now. You’ve researched, found a broker you like, and even developed a strategy that seems to work. But after months of trading, you’re still using a small account, and your profits don’t seem to add up. This is a common experience for self-funded traders who don’t use prop trading accounts to scale up their trading. Proprietary or prop trading can provide traders with the capital and resources to scale up their trading, find consistency, and unlock their full potential. This blog discusses prop trading, its benefits, and how you can start with one of the best-funded trading accounts.
If you’re looking for a way to get started with prop trading, AquaFunded’s funded trading program can help you achieve your goals. Their program offers quick access to trading capital, allowing you to scale up your trading and unlock your full potential.
What is Prop Trading?
Proprietary trading, or prop trading, is when a firm or bank invests its own money to earn direct market profits instead of earning commissions by trading on behalf of clients. When a financial firm opts to profit from market activities rather than the thin-margin commissions obtained through client trading activity, that's prop trading.
Prop trading involves diverse financial instruments, including:
- Stock
- Bonds
- Commodities
- Currencies
Firms engaging in proprietary trading believe they have a competitive advantage that will enable them to earn an annual return that exceeds index investing or other investment styles.
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How does Prop Trading Work?
Prop trading, short for proprietary trading, involves financial firms using their capital to trade:
- Stocks
- Bonds
- Currencies
- Other financial instruments
For their profit. This differs from traditional trading, where a firm buys and sells securities on behalf of clients and collects commissions or fees for facilitating the transactions.
How Does Prop Trading Work?
In prop trading, the traders employed by the financial firm or hedge fund make these buy-and-sell decisions instead of the clients. The profits generated from prop trading go directly to the firm rather than the client.
The practice can be highly lucrative for the trading firm and the individual traders involved.
How Do You Get Started With Prop Trading?
To get started with prop trading, traders usually need to apply to a proprietary trading firm. Once accepted, they may undergo training before starting to trade with the firm’s capital. While prop trading is often associated with high-risk trading strategies, these firms may also employ traders who utilize more conservative strategy and focus on generating steady returns over time.
How Do Prop Traders Get Paid?
Prop trading firms aim to make money like any other business. One method of generating revenue is the challenge model, which allows traders to qualify for a funded account.
Prop firms that offer a challenge model typically make money through the fees that they charge for the challenge itself. These fees vary widely depending on the prop firm but are typically a few hundred dollars or more.
Challenge Fees as a Revenue Stream for Prop Firms
In a typical challenge model, the prop firm gives the trader a certain amount of virtual money to trade. The trader must then meet specific profit targets to pass the challenge.
Once they pass the challenge, they are given a funded account that they can use to trade with real money. This model allows the prop firm to make money while allowing traders to prove themselves and earn a funded account.
High Failure Rates and Strict Trading Conditions
Prop firms earn money when a trader fails the challenge. In reality, the prop firm will never refund the fees to traders who failed the challenge because it is in their best interest for most traders to fail.
Although it doesn't seem standard in other industries, this is how most prop firms operate. Some prop firms are aware that 90% of traders will not be able to comply with the strict rules and are influenced to develop extremely tough trading conditions to profit from traders who fail the challenge.
Profit Sharing Plans: How Prop Firms Benefit From Trader Success
Traders through the evaluation phase join profit-sharing agreements with the prop firms. Depending on the particular program and firm, the trader and the firm split the profit differently.
The company usually takes a bigger cut of the profits, often up to 70% or more. Top prop trading companies might provide traders with more advantageous profit splits, like 80% or 90%, but these schemes might come with more upfront expenses.
Negotiating Profit Splits with Prop Firms
Traders can bargain for a higher portion of the profits if they meet targets and follow risk management procedures. It is typical to move from an 80/20 split to a 90/10 split or from a 50/50 split to a 25/75 split.
The percentage of profits that a prop firm takes can vary, but it is usually somewhere between 10% and 50%. So, for example, if a trader makes $10,000 in profits, the prop firm might take a 30% cut, leaving the trader with $7,000.
Membership Fees: The Steady Income Stream for Prop Firms
Membership fees provide prop firms with a steady stream of revenue that is not dependent on the performance of their traders. This is important because it gives the firm a reliable source of income that can be used to cover expenses such as:
- Rent
- Utilities
- Salaries
- Other costs
It also allows the firm to reinvest in its business by developing new trading platforms or expanding its research and development capabilities.
The Role of Membership Fees in Prop Firm Profitability
Membership fees help cover the costs of supporting traders, such as:
- Educational resources
- Customer service
These factors contribute to a prop firm's overall profitability. To renew their membership, traders must pay the membership fees monthly or annually to the prop trading firm.
If this fee is not paid, the agreement between the trader and the firm may be terminated. While assessing the profit from trading with the prop firm, traders must consider the effect of the membership fee.
Educational Fees: How Prop Firms Monetize Trader Training
Educational fees are another source of income for many prop firms. These fees are charged for:
- Online courses
- Webinars
- Mentorship programs
- Other educational resources
That traders can use to improve their trading skills. While some of these resources may be free, many prop firms offer premium content that requires a fee.
This educational content can range from basic trading strategies to more advanced topics like market analysis and risk management. By charging for this educational content, prop firms can make money while providing valuable services to their traders.
Commissions: The Cost of Trading With a Prop Firm
Most prop firms also make money through commissions, which are fees charged for each trade executed. These commissions are usually paid to the broker that executes the trade, and then a portion is passed on to the prop firm. The exact amount of the commission varies depending on:
- Type of trade
- Size of the trade
- Specific broker used
For example, a prop firm might charge $1 per contract for stock options, while futures contracts might have a commission of $3 per contract. These commissions add up over time, and while they may not be significant, they also add to the prop firm's source of income.
Interest-on-Margin Loans: How Margin Fees Benefit Prop Firms
Props firms also make money through interest-on-margin loans. Margin loans are given to traders to make larger trades than they can with their capital. These loans are secured by the securities in the trader's account and are typically offered at higher interest rates than traditional loans.
For example, a trader might be able to borrow $50,000 with a margin loan, but depending on the agreement between the trader and the firm, they would be charged an interest rate of 10% or more. The prop firm then earns money by collecting interest on the loan.
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How Profitable Is Prop Trading?
Proprietary trading, often referred to as prop trading, can be highly profitable. It also comes with significant risks. The profitability of prop trading depends on various factors, such as:
- The trading strategy
- Market conditions
- The skill level of traders
- The firm's risk management practices
Factors Influencing Profitability
Trading Strategies
A variety of trading strategies can influence profitability in prop trading. Some of these strategies include:
- High-Frequency Trading (HFT): This strategy can be profitable, but it requires advanced technology, capital, and a significant amount of time to develop.
- Arbitrage: This low-risk trading strategy can be consistently profitable but often involves small margins.
- Market Making: This strategy can be profitable in volatile markets; It requires managing risk carefully.
- Directional Trading: This strategy can offer high potential returns, but it also comes with higher risks as it depends on market movements.
Market Conditions
Market conditions can also influence profitability levels in prop trading. Volatile markets often provide more opportunities for profits but also increase risk. In stable markets, profits may be lower, but the risk is generally reduced.
Skill Level
The skill level of traders can also significantly impact profitability in prop trading. Experienced and skilled traders with a deep understanding of market behavior tend to be more profitable, so firms invest heavily in training their traders to maximize profitability.
Risk Management
Effective risk management is crucial for profitability. Poor risk management can lead to significant losses, even wiping out profits from successful trades. Firms use various tools and strategies to manage risk, including setting strict limits on losses.
Leverage
Prop trading firms often use leverage to increase the potential returns on trades. While this can boost profits, it also increases the risk of losses.
Potential Profitability
Top traders in successful prop trading firms can earn substantial profits annually, often in the six-figure or even seven-figure range. Firms typically take a percentage of the profits as a fee, so traders' take-home profits can vary. The firm can be highly profitable if it has a good pool of traders and effective risk management practices.
10 Best Prop Trading Platforms for Successful Trading
1. AquaFunded: Your Trading Profits Can Soar With This Dubai-Based Firm
AquaFunded is a Dubai-based proprietary trading firm that provides traders:
- Access to funded trading accounts of up to $5 million and profit splits of up to 95%.
- The company has a unique funding model with easy-to-achieve profit targets of 8% and fast bi-weekly payouts.
- There is even an option for the first payout to be processed in just seven days.
AquaFunded caters to traders of all experience levels, from beginners to those with a few years of experience who want to trade with reduced risk using the firm's capital instead of their own. With its competitive features and UAE-based operations, AquaFunded aims to stand out in the crowded prop trading market and provide a trustworthy platform for traders looking to scale their profits.
Get started with AquaFunded's funded trading program today!
2. Apex Trader Funding: The Easiest Futures Trading Account to Fund
Apex Trader Funding specializes in futures trading and offers 100% of the first $25,000 earned in its evaluation program. You can trade mini or micro contracts in the evaluation period, and once the evaluation has been passed, you'll move to a funded account.
After the first $25,000, traders earn 90% profit splits. Apex Trader also boasts the most lucrative payouts of any futures prop trading account. You can use Rithmic or Tradovate and choose from one of several different accounts with the following:
- A particular number of contracts
- Profit goal
- Trailing threshold
- And more
3. Earn2Trade: A Funded Account With Educational Perks
Founded in 2017, Earn2Trade is a futures trading education and evaluation company. It provides flexible funded programs to help traders of all skill levels start trading futures professionally and scale their accounts.
The company offers single-step evaluations in a simulated environment to test traders' proficiency, discipline, and risk management skills. Successful candidates receive a guaranteed funding offer from their partner proprietary trading firm. Funded traders enjoy easy profit withdrawals, while candidates benefit from access to free educational materials and advanced trading tools.
4. Funder Trading: The Best Proprietary Trading Firm for 2024
Funder Trading claims our top position in our best proprietary trading firm rankings due to its user-centric strategy for traders. Most traders using some of these prop trading companies often know how complicated they can be. Prop trading firms may offer:
- Minimal customer service
- Over-the-top complexity
- Need more education
These are among some of the commonly-named drawbacks of prop trading. Funder’s day trading platform is designed for the everyday trader by regular traders. We especially like that Funder Trading is the only prop firm in 2024 offering options funding without certification or upfront trading capital. That’s a big deal for this form of trading, especially with the popularity of options trading over the last few years.
5. FXIFY: A Prop Firm That Promises a Lot of Capital
FXIFY is a proprietary trading firm that offers access to up to $400,000 for those who pass the assessment. With profit shares as high as 90%, you can scale your account up to $4 million.
Trading is available on MetaTrader 4 (MT4) or MetaTrader 5 (MT5) and assorted trading platforms through the firm’s partnership with FXPIG. FXIFY offers instant payouts, no consistency rules, unlimited trading days, and a 125% refund on your assessment fee with your first payout.
6. TopStep: A Leading Futures Prop Firm With a Focus on Education
TopStep is one of the industry's oldest and most reputable prop firms. The two-phase evaluation, consisting of a Trading Combine and a Funded Account stage, is rigorous but fair, ensuring that only skilled traders can access the funded capital for this trading pit.
Although most of this is an additional charge, one notable highlight of Topstep is its focus on education and performance coaching. Traders can access a wealth of educational resources to improve their trading experience. The performance coaching services provide personalized advice to help traders develop strategies and manage risks effectively.
7. Trade the Pool: A New Firm for Diverse Strategies and Risk Management
Established in 2022, Trade the Pool prioritizes providing you with robust risk management tools and caters to a diverse range of trading styles, including:
- Day trading
- Swing trading
- Professional trading needs
With support for trading stocks and CFDs, the platform welcomes traders of varying experience levels, offering guidance and assistance to inexperienced traders. They offer access to over 12,000 stocks and ETFs, and the platform aims to diversify trading options and provide educational resources to enhance users' trading knowledge.
8. My Funded Futures: A Rising Star Among Futures Prop Firms
MyFundedFutures is a rising star on this list for various reasons, but most notably because it boasts one of the highest pass rates for its evaluation program out of all the futures prop firms on this list. MyFundedFutures is a prop trading firm that has gained attention for its accessible approach to funding futures traders.
The firm offers traders a clear path to funding, emphasizing flexible trading strategies and a supportive learning environment. Its rules are much less stringent than those of other prop firms, making your funding path much easier.
9. The 5%ers: A Low-Cost Gateway Into Forex Trading
The 5%ers platform offers a gateway into prop trading, allowing you to access forex, metals, and indices trading with minimal barriers to entry. The platform supports MT5 trading and offers profit splits of up to 100%, exclusive resources and salary offers on select higher-stakes programs.
The 5%ers offers a demo account for as little as $95, which allows you to enjoy instant trading access after passing the evaluation. This will enable you to develop your trading strategies without the burden of subscription fees.
10. TopOneTrader: A Simple Approach to Forex Prop Trading
At Top One Trader, accessing forex trading is straightforward. With flexible evaluations and conditions, you can secure up to $200,000 in funding, extendable to $5 million with consistent success. No trading day restrictions exist; weekend and news trading are allowed, even with expert advisors.
Is Prop Trading A Good Idea?
Prop firms are an excellent opportunity for beginner traders to learn risk management, discipline, and grow their trading capital. Many new traders think prop firms are only reserved for traders with extensive experience and years under their belts. The reality is this isn’t true!
The barrier of entry to becoming a funded forex trader is lower than ever, and this provides a huge number of opportunities for traders, both new and experienced. There are more benefits of prop firm trading for newbie traders and beginners due to the strict risk management and discipline that is pushed upon you by the rules set out by prop firms.
5 Tips For Successful Prop Trading
1. Understand the Basics of Prop Trading
Before you begin your journey with a prop firm, it’s essential to understand the basics of prop trading. Proprietary trading, often called prop trading, empowers traders to utilize their capital to execute trades on behalf of a firm.
This approach offers a pathway to sustainable profitability, enabling traders to seize market opportunities while mitigating additional risks. Depending on the firm’s liquidity providers, traders may engage in trading various assets such as:
- Stocks
- Commodities
- Foreign currency
- And more
Understanding the Risks and Rewards of Prop Trading
This dynamic nature makes prop trading an enticing career avenue for those seeking substantial financial gains. It’s imperative to acknowledge and comprehend the inherent risks involved in this venture.
Before taking the plunge, ensure you’re well-versed in the intricacies of prop trading to navigate the markets effectively and responsibly. Gaining a comprehensive understanding of prop trading will equip you with the necessary skills and instill confidence as you begin this exciting journey in finance.
2. Build Relationships with Fellow Traders
Connecting with other traders and establishing meaningful relationships is not just beneficial; it’s essential for a proprietary trader’s journey toward success. Networking is a gateway to expanding your trading horizons while deepening your understanding of market dynamics. These connections offer invaluable insights and guidance, whether through:
- Online forums
- Face-to-face interactions at trade shows
- Casual conversations with fellow traders
Sharing experiences and learning from others’ perspectives enriches your trading strategies and fosters personal growth. Each interaction is an opportunity to:
- Gain new perspectives
- Refine your approach
- Uncover untapped potential in the markets
Beyond networking, joining a supportive community like the one at OFP prop firm can provide a nurturing environment for traders’ growth. OFP Discord community serves as a gathering place where aspiring proprietary traders converge to exchange ideas, extend support, and celebrate collective achievements.
3. Stay Focused on Your Goals
Discipline serves as the bedrock of success in proprietary trading. Beyond merely adhering to:
- Trading strategy
- Diligently managing risks
- Steering clear of emotional pitfalls
Traders must cultivate a culture of organization and unwavering focus in every aspect of their trading endeavors.
This entails meticulously tracking trading activities, conducting thorough research, and leveraging comprehensive analysis to inform decision-making processes. By embracing this disciplined approach, traders can confidently navigate the intricate terrain of proprietary trading, ensuring that each investment decision is grounded in sound reasoning and supported by a wealth of information.
The Importance of Discipline and Organization in Prop Trading
Maintaining a steadfast commitment to organization and discipline, traders establish a solid framework for achieving their financial objectives and optimizing their returns. Discipline is not just a virtue; it’s the cornerstone of successful proprietary trading.
It offers traders the resilience and clarity of purpose needed to thrive in today’s dynamic markets.
4. Invest In Yourself
Investing in yourself is like planting seeds for success in proprietary trading. Suppose you want to thrive in this field. In that case, it’s crucial to devote time and energy to expanding your market knowledge, staying in the loop with industry shifts, and establishing a solid reputation.
Continuous learning and staying informed about market dynamics are your secret weapons for success. By prioritizing self-investment, you’re giving yourself a leg up in the race to become a top-notch prop trader and reach your ultimate goals.
Mastering Market Knowledge and Trading Skills
To truly excel, you’ve got to dive deep into understanding the financial markets and the various instruments you’ll be trading. This means grasping the ins and outs of what can sway security prices, from economic indicators to company updates and global events.
Sharpen your skills by enrolling in online courses, devouring trading books, and gaining hands-on experience with trading simulators or through a prop trading firm.
5. Choose a Reputable Prop Firm
Selecting the right prop trading firm, such as AquaFunded, is critical. You want to align yourself with a company led by trustworthy individuals known for their solid reputation in the industry. Equally important is finding a firm with robust liquidity providers who ensure swift and seamless transactions of securities in the market.
Staying vigilant against scammers and fraudsters lurking in the prop trading is essential. They often employ deceptive tactics, like fake websites or contact details, to swindle personal information. Be cautious and do thorough research before engaging with any firm.
Join Our Funded Trading Program Today - Trade with our Capital and Keep 90% of the Profit
AquaFunded is a Dubai-based proprietary trading firm that provides traders access to funded trading accounts of up to $5 million and profit splits of up to 95%. The company has a unique funding model with easy-to-achieve profit targets of 8% and fast bi-weekly payouts. There is even an option for the first payout to be processed in just seven days.
AquaFunded caters to traders of all experience levels, from beginners to those with a few years of experience who want to trade with reduced risk using the firm's capital instead of their own. With its competitive features and UAE-based operations, AquaFunded aims to stand out in the crowded prop trading market and provide a trustworthy platform for traders looking to scale their profits.
Get started with AquaFunded's funded trading program today!
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