What is prop trading, the pros and cons of trading in a prop company

Обучение трейдингу

In the vast majority, only a few traders can, over time, earn amounts with five or six zeros, they begin their journey by learning the rules of prop trading. From this article, novice traders can find answers to the following questions:

  • What is prop trading.
  • The systemic structure of companies based on prop trading.
  • What are the benefits of a private trader and financial institutions?
  • The principle of functioning of prop trading.

What is prop trading, the pros and cons of trading in a prop company

How does a prop trading business model work?

Prop trading has a simple and straightforward financial model. Despite this, in the countries of Eastern Europe, prop trading has not found much popularity. The reason for this is the exchange history. In the west, exchanges have been operating for about a hundred years, while in the Russian Federation and the CIS countries, exchanges have been operating for only a few decades.

Proprietary trading is an investment based business model in which investments are managed on an exchange by invited traders from outside. All income will be split in different proportions between the company and the prop trader.

In order for an investment company to conduct stock trading, it must have the following elements: capital, stable brokerage commissions, and special software. However, this is not all that is needed to run a successful business. Prop companies often lack trading skills. This is where traders appear who know how to trade on the stock exchange, but do not have the appropriate software and capital. The prop appears at the moment when traders and an investor meet. When considering a classic prop, funds move exclusively in one direction throughout the entire time. The profit that is earned on the exchange is withdrawn from the turnover and divided between the company and the trader. Usually, the missed gets the smaller part, and the trader gets the bigger one. The target of a prop is considered to be profit,and the company itself is considered a full-fledged commercial organization.
What is prop trading, the pros and cons of trading in a prop company

In the prop-business system, its weak side immediately becomes visible. There will be no business until traders start making money. This is an important point that must be taken into account.

The broker’s earnings are based on percentage of balances and commission. For him, it makes no difference whether the trader is trading in profit or, on the contrary, is losing money. A trader-blogger makes money on advertising and his subscribers, so his income does not depend on the quality of the audience’s bidding. Some brokers set up special training centers for traders whose profits depend on the tuition fees. Only the prop is knocked out of the entire system, which, like an ordinary trader, earns only on the exchange market.

Prop trading strategy

In theory, a prop can trade whatever he wants. A prop can engage in opposition trading, arbitrage, options strategy, and pair trading. However, in most cases, props prefer those tools where they can carefully monitor possible risks. For such a business, it is vital to control all kinds of risks. If a company starts to incur losses one day, as often happens, then the very next day it will have to continue its work properly, as if nothing had happened. To do this, you need to set the maximum loss limit for the company. Among all the trading instruments, it is best to monitor the risks within the day. For this reason, many propellers are intraday or scalpers. One more feature is also important for proper day trading.It provides significant income and does not require a lot of capital. The amount of capital is limited by daily liquidity, while sky-high profitability is provided by the high activity of transactions.
What is prop trading, the pros and cons of trading in a prop companyFor large investors, companies and funds, props are considered pawns of the market. With a small capital, props can earn huge percentages. Ninety percent of the success in the prop business depends on the team of traders, since this is the main capital of the whole prop. Anyone has a core of several traders who generate the bulk of the company’s entire revenue. The second team includes that part of traders who are not yet ready to become the basis, but are already earning money for the company. All the rest are newbies, which are the majority and they only plan to become real traders, but there is no guarantee that they will succeed. For this business, there is Pareto’s law, which says: the main share of the profit of any prop project is earned by leading traders.
What is prop trading, the pros and cons of trading in a prop companyPareto’s Law in Action [/ caption] It is rare that a trader can switch from one prop to another. Most often, newcomers begin their training in one proprietary company, and spend their entire career there until they want to leave the business at all. Every prop is interested in attracting quality newbies, as they can become traders-leaders over time. However, in addition to promising newcomers, there are many unpromising ones. Some of those who come do not even own a computer, and some are able to quickly burn out or devote very little of their own time. Therefore, taking everyone into business is a waste of time. In order to save time, each prop develops its own candidate screening system for further training.

Preparation system and first steps

One of the main details of a prop is the preparation of future traders. There is a lot of turnover in the prop business, a lot of people come and go. By investing in newbie training today, you can become a top-notch professional trader tomorrow. This will provide the prop business with a stable income. Therefore, for props, staff training is a matter of survival. By training to the level of the best traders, company owners try to keep them. To this end, they organize a team atmosphere in their team. Here people should support each other and create a friendly atmosphere. This makes it easy for a newcomer to join a team of professionals.
What is prop trading, the pros and cons of trading in a prop companyAn example of a training program for a beginner trader in a pop trading company [/ caption]

Remote work

All modern exchanges operate using an Internet connection. Previously, only residents of large cities could become exchange players. Now a trader can work remotely from anywhere in the world. About ten years ago, they were looking for their candidates exclusively in their own city. Now this system has been radically rebuilt. Despite the fact that there are dealing rooms left, newcomers can be looked for almost everywhere. The qualifying word is almost there for a reason, as the time zone is still very important for traders. Remote work has also changed the format of interaction in pro. At the beginning of the 2000s, newcomers were trained in the company’s office. Now they have long since moved away from this, and all training takes place in the format of webinars and voice chats. This quickly yielded results. Many prop teams have traders in their composition,who have never met in real life, and most likely will not meet.

What should a trader pay attention to when choosing a proprietary trading company?

You need to look at the amount of the insurance premium and the conditions for its payment. The deposit should provide an increase in the volume of transactions at the expense of a part of the capital of the organization. At the same time, a trader should not limit the volume of transactions, and also not increase risks during current drawdowns. How to become a trader in a prop trading company in practice: https://youtu.be/RGEVaEtaQ4g

Trader contests in pro-trading companies

Large prop companies use demo accounts for such events. If contests are held on real accounts, then the deposited funds without a prize place will not be returned to the owners. However, even the winners of the competition may not receive money management. Real trading in market conditions differs significantly from the conditions of the competition. A trader will have to prove his worth with numbers so that he can get into a large prop company.

Benefits of prop trading

Financial organizations can note the following advantages for themselves:

  1. With minimal risk and investment, the possibility of obtaining maximum profit.
  2. During trading on the stock market, there is a stock of securities.
  3. You can create your own liquidity, as well as become a market maker for certain securities.

Benefits for traders:

  1. Maximum leverage.
  2. An internship with successful traders.
  3. The trader’s earnings are not limited by anything.
  4. You can further use the experience gained in other spheres of life.

Pros and cons of a trader when working through a pro-company:
What is prop trading, the pros and cons of trading in a prop company

Domestic and foreign prop-trading companies

The most popular American firm is SMB Capital. Its founder, Mike Bellafiore, wrote the famous book One Good Trade. On the territory of Russia, prop trading companies appeared only in the early 2000s, because of this there are not so many of them now. Some companies recruit people to their teams through competitions. One of the currently popular prop trading companies LMI Liberty Market Investment https://www.lmitrade.com/.
What is prop trading, the pros and cons of trading in a prop companyProgram for selection to prop-trading company LMI [/ caption]

What else does a trader need

To make trading your main source of income, you must:

  1. Time . In trading, there is a direct relationship between the time spent and the closing of successful trades.
  2. Flexibility . A person should not be afraid to make a mistake, as well as constantly learn and improve himself.
  3. Willpower . While learning to trade, a person will make many mistakes. You need to try to cope with mistakes, as well as loss of money. Only control of emotions and work on mistakes will allow you to succeed.


What is prop trading, the pros and cons of trading in a prop companyTrader’s life – not everyone is ready for this [/ caption] The prop-trading format provides an opportunity for beginners to improve their skills in this profession on a real brokerage platform. In no time, newbies, under the guidance of experienced traders, reach their peak. Therefore, for beginners, this is the best option. Experienced participants will not be entirely interested in this option, but it should not be written off from the accounts. The prop brings profit to both the trader and the company itself, so there is absolutely no conflict of interest between them.

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Programming, investment and algorithmic trading
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