Proprietary trading offers funded accounts and high profit potential without risking personal capital. But is it right for everyone? This article explores the key advantages and difficulties of prop trading, helping traders weigh the opportunity against the potential challenges and how to overcome them before diving in.
"Prop trading," or proprietary trading, is becoming increasingly popular with retail traders who want to make more money without risking their own savings.
In prop trading, a company gives traders money to trade in the markets, and in return, the company gets a cut of the gains. Traders usually have to pass a test or challenge phase to show they know what they're doing before they can have a funded account. If you’re new to prop trading, refer to our previous article “An introduction to proprietary trading” to learn more.
It sounds good to trade with a company's money and share in the rewards, but there are also potential difficulties to think about. Let's look at the main advantages, and then we will discuss the difficulties and offer some tips on how to overcome them.
Benefits of prop trading
1. Low risk to your own capital
One of the best things about prop trading is that traders don't have to risk their own money. Newer traders who wish to learn without worrying about losing their money will find this appealing.
2. Access to more capital
Prop firms can give traders accounts with far more money than they could afford on their own. This allows traders the chance to grow and make more money if they are good at trading and maintaining their account.
3. Profit sharing
Most prop businesses share profits between traders and the firm, with traders getting up to 80–90% of the profits. This lets competent traders make good money while the firm takes care of the financial underpinning.
4. A structured trading environment
Prop firms have rules and guidelines that traders must abide by to avoid losing their challenge account. Every prop trading firm sets two primary limits: maximum drawdown (how much you may lose overall) and daily drawdown (how much you could lose in one day). Besides these limits, accounts which are inactive over a certain period will be breached. These rules may seem regimental at first, but they help traders establish discipline and control risk, two essential attributes for long-term success.
Potential difficulties of prop trading
1. Passing the evaluation
Most of the time, traders must pass an evaluation with specific rules to have a funded account. The assessment may be one phase or two phases. The criteria for passing the challenge can be rigorous and may not show how flexible the real market is.
2. Getting payouts
Some companies may delay payouts, meaning traders might not get paid, even if they make money. A reputable prop firm should have a straightforward and rapid payout process. Search for companies that offer fast processing times and various withdrawal options. It is essential to choose a provider with a viable and sustainable business model; this way, you can be assured that there will be no unnecessary delays or interruptions to payouts.
3. Rules and limits
Different prop firms have specific trading regulations, including maximum daily losses (fixed vs dynamic), drawdown limitations (static vs trailing), and prohibitions on news trading. You can be disqualified even if your trades are making money if you break the rules. To avoid this, ensure you read up on the rules and regulations of the prop firm.
4. Costs for the evaluation
Most companies charge traders to take the evaluation, meaning they must pay up front. If they fail, they lose the fee. The only way to overcome this is to keep a trading journal and be disciplined in learning how to trade, to become so good at trading that you can pass.
Prop trading can be a rewarding way to trade
Prop trading can be an excellent way for people who want to trade but don't have the money to do it on a large scale to get started. You need to be disciplined, consistent, and know the company's policies to get ahead of the game. Before you start, consider your trading style, how much risk you're willing to take, and how ready you are to follow the firm's review procedure. If you do it well, prop trading can be very rewarding as it lets you access funds to trade without risking your own capital.
Prop trading is like a performance sport in which consistency is a critical trait. You need consistency to avoid breaching or losing your account, and sound risk management is key to staying consistent in prop trading.
Whether you’re new or experienced, gaining relevant trading knowledge and technical analysis skills are essential for you to be able to develop your risk management skills. Besides knowledge, you’ll find value and support within a community of like-minded traders. The OANDA Prop Trader Community is the hub for prop traders of all levels to connect, learn, and succeed together. Whether you want to improve your trading strategies, share insights, or earn rewards, this community is designed for you.
Why wait? Start trading smarter today with our community, join the conversation here.
