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Prop Trading Guide for Beginners (Pros & Cons) – Trader2B

Getting started with prop trading. Learn what you need to know to become a proprietary day trader, including the pros and cons.

The Ultimate Beginner’s Guide to Prop Trading

To become a proprietary day trader, there are a few things you need to know. What is prop trading? How does it work? What are the pros and cons? What are the best proprietary trading firms? If you require answers to these questions, then you want to continue reading.

What is Prop Trading?

The traditional hedge fund works this way – An individual invests their money, the firm trades on their behalf and give commissions based on the agreed timeline.  The people who trade in these firms are day traders but they receive salaries and bonuses just like the average employee.

As a prop trader, you’re more than just an employee. The trading firm trades their own capital with you taking part of the profits. It’s a win-win situation where you only have to leverage your skills to make money for yourself and the company.

Prop trading has the potential to be lucrative, but it doesn’t go without mentioning its barrier of entry and how difficult it is to generate those profits.


How Prop Trading Works

As a proprietary day trader, you’re a contractor to a proprietary trading firm, rather than an employee. Prop traders don’t work on hourly wages and do not receive benefits such as health care. You get paid as you generate profits for the firm.

You also get to trade stocks, currencies, options, and/or futures on major global exchanges on the firm’s behalf. A prop trader does not engage in phone sales or cold calls with prospective customers. You’re not a stockbroker or financial adviser and you are less concerned about future trends. Your sole focus is to take advantage of quick trading trends.


Prop Trading Salary

 It depends on you – How skilled you are and how much you’re willing to trade daily. There’re different types of proprietary day traders. Some only trade a few times a day for bigger gains.

Other proprietary day traders make hundreds of small trades a day, jumping in and out of the market.

In addition, some trade the entire day, while others only trade certain hours of the day. Proprietary day traders are able to work in the office, where they are initially trained, and some are allowed to work remotely. Although, day traders who are allowed to work from home are typically experienced and have a history of success with the firm, or are hired as experienced traders with a proven track record.


Pros of Proprietary Trading

Here’re a few advantages of becoming a proprietary day trader.

  • Working with traders who can help you become profitable
  • Access to more trading capital than you would have on your own
  • Reduced commissions (typically) compared with what retail day traders face
  • Firm trading costs are frequently much lower than what traders could get trading on their own
  • Access to training from professional day traders. you may have to pay for training, as this helps the firm eliminate traders who are not serious
  • No need to worry about the $25,000 pattern day trading margin.

However, if you are new to day trading, then training is important. You want to learn from firms that produce successful traders and are not just making money off of training fees.

Learn more about day trading.


Cons of Proprietary Trading

Nevertheless, there are also some downsides to working as a proprietary day trader:

  • Many firms have moved online because it is cheaper than having a brick and mortar businesses. This means you might not be sitting physically among experienced traders when you start out. Chat rooms and Skype are useful tools, but might not be as effective as having other traders in-person to answer your questions
  • With more firms online, competition for seats on a physical trading floor is high
  • Retail technology has diminished the advantage of proprietary trading forms once had. Retail traders now have access to trading platforms and internet speeds that rival most proprietary resources.
  • While the commissions charged by a prop firm may still be lower, active retail day traders may be able to negotiate better commission rates with their broker
  • Costs charged to traders by some firms may include a seat rental fee, software access fees, marked-up commissions and a percentage of your profits.

If you are an experienced day trader, you should focus on finding the best prop trading firm that helps you maximize your profits.

Also read: How to become a successful day trader

Lastly, if you are considering quitting your current job to day trade, understand that it may take several months or more to start generating an income. Your income can fluctuate with no guarantees of success.


Typical Proprietary Firm Structure.

Proprietary trading firms typically have two model types of a slight variation on them:

  • The firm takes a cut of your profits, anywhere from 20-50 per cent. You’re able to start with little or no capital, although paying for training may be required. Firms may also require a deposit to offset any losses a trader incurs. Adequate trading capital is provided by the firm (based on experience and skill). With this model, trader’s profits are the main source of income for the firm. Commissions are typically low (firm makes little or nothing off commissions), allowing traders to generate more income. The firm may also charge a seat rental or software fee. This model is popular in Canada and other parts of the world.
  • The firm takes little or none of your profits, paying 90 to 100 per cent of your gains. Firms leverage your capital, meaning you typically need to have several thousand dollars or more to get started. You get more capital than you would by trading on your own, but the firm is going to make money off of training fees, higher commissions, seat fees, and software fees. This model is prevalent in the United States.

Also, you can choose to be paid a salary with bonuses or trained and hired as an employee. This is common among financial and commodity companies that have trading floors. You will have to work on their trading floor (a division that trades company money). Hours for this job are typically long, from eight to twelve hours per day.

Comparatively, prop traders typically work less than eight hours, and trades at home may work/trade for less than three hours


Best Prop Trading Firms.

When choosing the best proprietary firm, you want to look out for a few market and engagement models. They include:

  • What financial asset the firm provides
  • Physical or remote office
  • Training costs
  • Risk Policy
  • Trading requirements
  • Loyalty program
  • Terms of service

However, ensure to take time to do your research and go for a firm that provides long-term growth potential.

Check out Trader2B prop trading


Final thoughts.

Proprietary day trading is profitable if you work with a transparent firm that is not just focused on making profits. Don’t be rushed to a decision. Talk to a customer representative to understand what the firm has to offer. Hundreds of people like you take the Torochallenge to minimize risks and become a successful day trader at a little cost.


The term comes from the idea of using a pencil and paper to track your potential gains and losses had you invested your actual money.

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