What Is Prop Trading & How to Make Money With It?

By  Artem Khomenko 189 18 Sept 2023
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Prop trading represents a trading strategy where external traders are recruited and endowed with capital to engage in trading activities.

Predominantly, established funds and corporations engage in prop trading. At the heart of these prop trading firms lies a consistent effort to scout and hire traders, granting them the capital required for trading endeavors. The ensuing profits from these activities are then distributed between the trader and the firm, striking a balance that appeases both parties.

Let's navigate through the prop trading sector to discern its inherent advantages and challenges.

Prop Trading Mechanics

Typically, firms furnish traders with a substantial amount of money that vastly outstrips their personal capital. Before this, potential traders undergo stringent screening to validate their trading skills and expertise.

Most prop trading firms work as follows:

  • Traders contribute an initial stake, a standard procedure for all. The firm then supplements this with its own capital to achieve the requisite balance of assets.

  • The collective amount from losing trades shouldn't surpass the trader's personal balance, similar to the margin coverage in leveraged trading.

  • Positions shouldn't be held over to the next day; lingering on losing trades isn't permissible.

  • Every trader's deposit is shielded, with new trade activations automatically halting upon hitting a specified loss level.

It's important to note that no prop trading firm manages individual retail investors' money. They solely operate with their proprietary capital or that of official entities. Hence, any online propositions from “prop traders” mentioning capital management and monthly returns are likely fraudulent.

Pros and Cons of Prop Trading

Advantages:

  • The ability to manage substantial funds while having limited personal capital.

  • Access to specialized software, chart analysis tools, and indicators, many of which are typically premium.

  • A diverse roster of active traders, each with different strategies, providing a well-balanced operational approach.

  • No inherent conflict of interest between the trader and the firm. Transactions are conducted directly on the exchange, making it beneficial for both parties to seek maximum profits.

  • Opportunities for continuous learning and skill enhancement, supported by a professional environment.

Disadvantages:

  • Training traders to perform optimally requires both time and resources from the company.

  • High salaries for teams of traders and developers at prop firms can pose financial risks, especially with poor management.

  • The challenge of dealing with under-skilled traders who might not yield profits.

Risks for Prop Traders

The primary risk for traders is falling prey to deceptive entities masquerading as legitimate prop trading firms. In such scenarios, traders might not receive their due compensation or might become targets of larger scams.

Fraudulent prop firms might charge for training or for using their trading platforms. They might also set up sham trading contests that use participants' real funds.

Legally, a prop trading firm is responsible for losses that exceed a trader's initial capital. However, it's essential to scrutinize any agreement thoroughly before committing to such an organization.

How to Become a Prop Trader?

To be a successful prop trader, one needs proficiency in trading assets, including stocks, forex pairs, and cryptocurrencies. Entry into reputable prop trading firms often requires clearing an exam that tests both theoretical and hands-on trading skills. Typically, this exam can set you back by $80 to $200.

Prop firms might also host competitions using demo trading accounts. Standout performers often get job offers. Moreover, training or certification from a respected cryptocurrency entity can be an advantage, potentially translating into a recommendation for a job at a prop trading firm.

Leading Prop Trading Firms

As of this writing, the prop trading landscape is dominated by:

  • E8funding

  • FTMO

  • T4TCapital

  • Top Step

  • Surge Trader

However, it's crucial to realize that the realm of prop trading is dynamic. Firms may close due to financial or regulatory challenges, making room for newcomers.

Final Words

Prop trading offers a golden opportunity for traders to boost their crypto trading earnings, especially for those who lack substantial capital but have a proven track record of profitability. 

However, it's imperative to diligently vet a prop trading firm before committing, ensuring its credibility and stability.