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Prop Trading

Prop Trading

How it works. Prop trading is one of the forms of cooperation between a company and a private trader, which provides for a company transferring investor capital to a trader for management under certain conditions with stringent requirements. In other words, investors transfer money to prop companies, she is looking for prop traders who multiply this money.

Such cooperation differs from trust management in that the trader carries risks only within the framework of his capital, although he manages both his money and the money of the broker at the same time. That is, trading ends when the trader comes margin call in the framework of personal funds.

The basic principles of prop trading:

  • A trader is sure to replenish the deposit with his own funds.
  • The trader is always under the control of the risk manager of the company and adheres to the risk management strategy developed by the company.
  • The trader receives profit the next month after the reporting one, which ensures future losses (optional rule).

On average, a prop trader can get in the management of 20 – 300 thousand dollars. US money investors.

You can become a prop trader in two ways: win in tournaments or provide stats for a fixed period (that is, prove professionalism, but this option is rare). In general terms, this happens as follows: a potential participant of the “Harvester” (as each selection is called, the number of which is unlimited) pays an entry fee and gets access to a demo account that already has strict requirements for profit, drawdown, number of transactions, etc.

There may be several options for such accounts. A person must become the best and fulfill the requirements for the account, after which an agreement is made with him (if the selection rules are violated, the trader is removed from the competition and again buys the entry to the selection for pre-participation). Having received the amount of money under management under the contract, the trader must again strictly fulfill all the conditions. If the money is “poured” and this falls under violation of the terms of the contract (for example, the first month without loss), the trader returns to the beginning of the quest again.

These are the conditions of one of the most famous TopStepTrader companies in the world. Previously, the entry fee was 250 dollars. the USA, now – no information. But there are reviews that the “Harvesters” are really reliable here, but recently the conditions have become so harsh that it is difficult to pass them.

Here, the participation fee for the selection of 175-285 dollars. The USA depending on duration.

From theory to practice. The general scheme of participation is similar to tournaments: a trader needs to register with a prop company (each company has its own verification requirements), familiarize themselves with the rules and requirements of the tournament, pay for participation in the Combine and wait for the start. Also, prop-trading is offered by some brokers. An example of phased participation in one of the companies:

  • The first stage is the election cycle, which lasts 20-30 days. During this time, the trader must earn a fixed amount of money on the demo account, adhering to the requirements for the sum of the maximum daily drawdown, daily loss (loss limit), and the minimum number of profitable days. For violation of the requirements, the trader ends participation in the selection ahead of schedule.

Interesting fact. There are many descriptions of strategies on the Internet that allow you to go through the first qualifying stage. For example, on the very first day, a trader can earn the amount required for the entire period on a successful transaction, after which the remaining time does not trade at all or conduct trading with minimal risk.

  • The second stage (for those who have passed the first part) – trading with even more stringent conditions, presented for the most part not to the size of profit, but to compliance with risk management: trading with stops, the ban on averaging, the ban on trading during news releases, fixing 50% of profit upon the occurrence of certain conditions, etc.

An important point. In the conditions of prop companies, it is not always said that the second stage will also need to be passed. This moment is carefully veiled by the phrase: “You must prove that you know how to manage risk,” and how much it will be necessary to prove and what are the conditions for the next stages is silent. According to traders, qualifying rounds until the moment a trader receives real money in management can last 2-3 months. Moreover, the prop-company may make unreasonable claims, and the trader should be prepared for the fact that he will have to firmly defend his opinion. By the way, some manage to prove their case and there are real examples of those who went through all the selections.

Pros:

  • For the trader. If a person already intended to make money by trading, he does not lose anything, since he does not risk other people’s capital. On the contrary, due to the fact that his deposit increases significantly, he gets the opportunity to earn additional profit. Not everyone has a large amount to start, revealing more opportunities, and prop-trading is one of the ways to get it. There is also a psychological aspect: trading other people’s money is easier than your own.
  • For prop company. The company withholds its commission from the money earned by the trader.
  • For investors. They receive passive income subject to the performance of the prop trader.

Cons:

  • For the trader. It is difficult to achieve the location of a prop company (broker), strict conditions for the use of investor money, driving it into a narrow framework, a high risk of not being selected, having lost the entry fee.
  • For prop company. Her reputation is important, a prop trader needs to be educated. When a person becomes a professional, he prefers individual trading (I will write more about this in my next article on collective trading and affirmations).
  • For the investor: money will not work.

An important point: there are many “prop-companies” in the network that offer to go through paid training courses, promising further employment and other goodies. Prop companies select the best but do it for free (the cash contribution is organizational and paid training does not provide). Therefore, I would not recommend contacting the courses.

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