Best prop trading firms
Prop traders are in full control of their income, but this depends on the profit-sharing ratio of the chosen prop firm. As a result, anyone can be profitable as a prop trader because profitability is linked to their experience and skills, strategy, and ability to generate gains by trading in the market with the firm’s capital.
If you have heard of prop (proprietary) trading, you perhaps know that prop traders profit directly from their investment decisions. However, being successful as a prop trader depends on many factors, starting with your chosen prop firm, trading experience, strategies, and many other factors. Below, we’ll discuss the main pros and cons of prop trading, how much money you can make and lose, and what costs you should consider before starting your prop trading journey.
Prop trading: pros and cons
Prop trading means joining a firm as a contractor and using the firm’s capital to place trades, but is trading for a prop firm worth it? Let’s have a look at some of the main advantages and disadvantages.
Profit earning capabilities Firstly, perhaps the most important one is increased profits for the trader, who often receives most of the returns on their trades. In addition to this, prop firms often provide low commissions compared to brokers, which generate revenues from trading fees only.
Access to unique tools and software Prop traders also get access to many tools that enhance their chances of success, such as high-end technology that may not be available otherwise, high-quality information, and multiple trading platforms, which is a valuable aspect considering that retail clients can usually use only one trading platform.
Excellent support Prop firms usually manage a small team, unlike a broker that may have millions of users. This means that they can address all your concerns on time, while a regular broker may have a very long waiting time that could result in lost income.
Fewer operating costs Proprietary firms are less or not regulated at all; the benefit is that they usually have fewer operating costs. This allows them to split their income with the trader at a rate that benefits them.
Trading using the firm’s capital and high leverage Prop firms allow traders to use high leverage when trading. Also, unlike retail traders, you do not trade with your own capital, but with the firm’s capital.
Working flexibility You can choose between remote trading and in-house trading, although the latter may be more advantageous.
Easy to gain experience and knowledge Many prop firms provide free training resources and materials, including group coaching. Others could provide these learning resources for a fee. Most prop firms provide simulation accounts, so you can start prop trading with no experience.
Inventories of securities and liquidity Proprietary trading firms create inventories of securities, which helps the institution be ready for illiquid markets or downtrends when it is more difficult to trade on the market.
Despite these many pros, prop trading does come with a few disadvantages you should consider before embarking on this journey.
Lack of regulation Proprietary firms are less or not regulated at all – this puts you at higher risk, so you need to do your due diligence before choosing a prop firm.
Business risks Some prop firms may ask you to deposit a sum of money which acts as your risk contribution. Your deposit is uninsured and may be liable to fraud and other risks. You should only deposit money you afford to lose.
Lack of trading flexibility Most firms only offer day trading. Even if the chosen firm allows you to keep your positions open overnight, your allowed leverage is likely to be restricted.
Costs Prop trading comes with high fees, such as subscription fees, withdrawal fees, evaluation fees, and more.
Emotional impact Proprietary trading can be very stressful, as you trade the firm’s money instead of your own, and you need to account for your losses.
Job security and benefits There is a lack of employment benefits, such as health insurance, and job security, as you may lose your position if you fail to generate profits
How much money can I make in prop firms?
If you are wondering “Is trading for a prop firm worth it?”, you need to understand how these work. Prop trading is one of the most lucrative activities as the money you earn is determined by a profit-sharing ratio. Unlike brokers, for instance, which generate money from commissions or spreads, the prop firm benefits from directly trading or investing in the market.
Prop traders are not employees; rather, they work as contractors and do not have employee benefits, such as health insurance. The income for a prop trader is represented by the generated profits when trading stocks, Forex, options, futures, and other assets.
As a result, your income depends on which firm you choose and its profit-sharing ratio, which may range from 75/100 to 90/100. In any case, you should not opt for a firm that pays less than 70/100.
Some prop firms may employ a flexible profit-sharing ratio depending on your experience and trading strategy. For example, Fidelcrest offers 50% after you pass the evaluation stage, but you can get up to 90/100 as a funded Fidelcrest trader.
So, is prop trading profitable? There is no general rule when it comes to making money in prop firms. For example, TopStep is one of the best firms in the industry from this perspective, as it allows its traders to withdraw the first $5,000 in winnings, and 90% of all gains after that.
Overall, the money you make depends on the volume and profitability of the trades, negotiations, commissions, trading skills, and strategies. To maximize your earnings, you should:
Use leverage – however, this is a double-edged sword as higher leverage may generate higher gains, but the market can also go against you;
Devise multiple winning strategies based on theory rather than instinct;
Trade only with capital you can afford to lose; beginners may want to invest no more than $500 to $1,000;
Choose the right prop firm for your needs and skills regarding software and trading approach (such as technical vs fundamental analysis capabilities);
Make high-risk bets only if you have enough experience in the markets;
Focus on risk diversification strategies;
Analyze all relevant data when placing orders, including foreign economic factors.
Can I lose money in prop trading?
While prop trading is one of the most profitable opportunities, it is affected by asymmetric risk. This means that the profit-sharing ratio may be from 75% to 90%, but you bear 100% of the risk of your trades.
When becoming a prop trader, you often need to deposit an amount of money known as your risk contribution. As the name suggests, if your trades generate losses, the amount will be covered with your deposited money.
At the same time, risk contribution works as insurance since the prop trader may be deterred from engaging in very risky trades since their own capital is at risk as well.
As all investments come with risks, any prop trader can lose money. This may happen for a variety of reasons, such as an inappropriate trading strategy or wrong implementation of the strategy, failure to correctly assess the market conditions or understand information, and others.
What are prop trading costs?
The next question is: how much does a prop firm charge for trading? There is no clear answer to this question because it depends on your chosen firm. Here are some types of costs you should be aware of:
Fee for using proprietary software (may be about $200 per month);
Monthly subscription fee for the type of account chosen, including for simulation ones;
Withdrawal fees;
Evaluation fee (usually one-time);
You may have to pay for training or coaching, although some firms do offer this for free.
FAQs
Are prop traders profitable?
Prop traders are in full control of their income, but this depends on the profit-sharing ratio of the chosen prop firm. As a result, anyone can be profitable as a prop trader because profitability is linked to their experience and skills, strategy, and ability to generate gains by trading in the market with the firm’s capital.
Is working with a prop firm worth it?
There are many unique advantages that make working with a prop firm worth it. These include access to unique software and information, trading with the firm’s capital, and cashing in a large portion of your winnings.
What is the success rate of prop firms?
The success rate of a prop firm can be as high as 100% as long as you choose the right prop firm – since these lack regulation and licenses, you need to do your due diligence to pick a trustworthy company that aligns with your views and strategies.
What is the failure rate of prop traders?
According to statistics, about 11-25% of traders earn a profit. However, to maximize your chances of success, you can always start with a simulation account and carefully craft your trading strategy before using real money in the market.
