Being a prop trader is one of the ways of earning a living through trading. If you’ve not heard about prop trading then you need to see this post.
A prop trader is also known as a ‘proprietary trader’. Proprietary trading is one of the ways one can gain financial freedom. Prop trading is not as easy as making the sound ‘prop!! but is a way of making some huge profit trading.
To become a successful prop trader, you must know what prop trading is, understand the advantages and disadvantages, get licensed, and fund your account. You must also have a passion for trading, research prop trading firms, and get started on the right foot.
What is Prop Trading?
Prop trading, or proprietary trading, occurs when a trader accesses a firm’s capital to make trades.
The trader makes a deposit with the firm. And in so doing, the firm makes additional capital available to the trader.
This allows traders to magnify their upside potential. A prop trader can deposit $10,000 and trade $200,000 (or more) worth of securities at a time.
In exchange for the capital access, the firm charges the trader commissions and fees.
For profitable traders, the additional capital can prove to be highly lucrative since they are working with a larger amount of money.
Of course, the downside risk is equally magnified.
What you need to understand about prop trading
First things first: you should understand the advantages of proprietary trading.
The number 1 reason to become a prop trader is access to firm capital. If you don’t have this in mind then how can you make it as a prop trader?
A typical retail account gives you 2-4X leverage. So if you have $10,000 in your account, you can trade $20,000-$40,000 worth of securities at a time.
Prop traders can actually trade the firm’s capital, magnifying your buying power.
In a $10,000 account, that’s $200,000 for intraday trading and $80,000 for overnight positions.
Prop trading also offers direct market access, giving you total control over your executions.
Some retail trading firms offer direct market access. However, you will not be able to trade firm capital the way prop traders can.
Prop trading also gives you lifestyle flexibility. While you must abide by your firm’s rules and comply with regulatory requirements, your P&L is your boss. You set your own hours, and you work the way you want to work.
And of course, your paycheck is entirely determined by your ability to make trading profits.
Read Also- How to Avoid Losing Money in Forex
Who is a Prop trader?
A prop trader is a trader who executes an assortment of market strategies by accessing a firm’s capital.
Strategies used may include index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, technical analysis, and/or global macro trading.
5 Top Ways to Make it as a Prop Trader
Here are the major things to do to be successful as a prop trader.
1. Make Sure You Love Trading and the Market
It is not enough to go into proprietary trading solely because of the money.
Truth be told, trading is very challenging, you must love this art to make it as a prop trader.
So if you’re not following the market closely right now (and preferably you’re trading as well), odds are you are not cut out for prop trading.
Seriously, if you are looking for a way to get rich fast, this business is not for you.
You need to be passionate about it to pull through and get the money.
2. Make your research about trading
If you must go into prop trading, you must know how to trade and make research on trading firms.
One of the most important decisions you’ll make is what prop trading firm to join.
Obviously, you want to ensure any firms can actually accommodate you. For example, you may need to trade remotely from your home, or you may want to trade in a specific city.
We strongly recommend only considering fully registered and regulated firms with a history in the business. Non-registered firms that do not require licensing may operate under hedge fund structures that actually put your capital deposit at risk.
You may not be eager to study for regulatory exams, but working with a registered firm can keep you safer.
And of course, make sure your firm has the asset classes you need, like equities, options, and/or futures.
3. Prepare yourself for prop trader interview
Prop trading firms will interview you to determine whether you’re a good fit. So be ready to discuss exactly why you’re interested in prop trading, and why you think you’ll succeed.
If you have trading experience, even at a very basic level, be ready to talk about it — specifically, where you think you’ve done well, and where you need to improve. A good firm will also want to know about you as a person.
4. Get Mentored By Experienced Traders and Start Learning
When you’re getting started, it is critical that you work with experienced traders and learn as much about trading as possible.
Get someone who would be ready to make time for one-on-one and group conversations to help you get acclimated to the industry.
If your knowledge base is not expanding rapidly, you are doing something wrong.
5. Begin paper trading then go live
Paper trading is an ideal way to get yourself used to your trading platform and tech setup, which reduces the chance of error when you trade with real money.
Paper trading is also a good way to test-drive certain strategies, and train your brain to execute trades after spotting setups.
Just remember that paper trading is not a perfect substitute for real money trading, because having capital at risk has a major impact on your psychology.
Assuming you pass your exams and fulfill all regulatory requirements, it’s time to go live.
That means leaving the simulator behind and risking real capital in real market conditions.
If you’ve followed all the steps in this guide, hopefully, you’ll at least be in the position to succeed.
Proprietary trading is one of the trading strategies that can be utilized for gaining financial freedom. It is very important to master the art before fully going into it.