Proprietary Trading: Everything you need to know

In this article, you will learn what prop trading is, how prop traders make money, and how to start trading with over $100,000. Every day hundreds of traders get funded by a prop firm. Here’s how to become one of them.

Let's get started.

What is prop trading?

Prop trading comes from "Proprietary trading". This is a type of investment where traders trade with the broker's capital. In this case, it is not a standard CFD broker, but a company providing financing to retail traders - a prop company. In return, the prop firm receives a portion of the profit generated.

The difference is that usually traders use their own funds, while in this case, the financing is entirely at the company's expense - traders do not risk their own capital.

In other words, prop trading is when a prop firm "hires" traders to trade with its capital. Funding provided by the prop firm varies widely but can reach over $1,000,000.

What is a prop trader and how do they make money?

A prop trader trades the financial markets using capital provided by a proprietary trading firm. Traders make their own decisions about when and what to trade and have one goal - to increase the initial investment and earn money from trading.

Prop traders may trade currency pairs, gold, stocks, cryptocurrencies, and other financial instruments. The profit is distributed between the trader and the company according to the terms of the contract, and in most cases, the prop trader receives more than 80% of the profit made on the account.

It's important to note that most present-day prop firms do not pay salaries to traders. While there are exceptions, they are relatively uncommon.

How much does a prop trader make?

Let's get straight to the point. Everyone is curious about this question. Since prop traders can trade large sums, their profit potential is virtually unlimited. Here are some statistics:

According to zippia.com, the money that a prop trader earns in the US is about $100,019. The standard amount that a prop trader receives varies between $60,000 and $165,000 per year. The average hourly rate is $48.09.

As per comparably.com, the figures are slightly different. According to the site, the average prop trader in the US makes $219,217. Prop traders earn the most in San Francisco, California at $326,609, which is 49% higher than the US average. Prop traders' compensation ranges from $42,373 to $793,331. Of those, 57% make between $203,679 and $400,084, with the top earning $793,331. Keep in mind that these are pre-tax figures, but they look tempting nonetheless.

How to get started in prop trading?

Prop trading can be started by anyone who wants to trade in global financial markets. These days, prop trading is more accessible than ever. Prop firms offer their services online, which means you can trade from anywhere as long as you use their software and trading rules.

To become a prop trader or a funded trader, as you will come across in some places on the internet, you need to apply for funding from a prop firm. Applying is a process where you fill out a short registration form on the company's website, choose the capital you want to trade with, and pay the fee.

Next is the evaluation phase in which you have to show that you have the skills to get funded. This evaluation phase is also called a ‘Challenge’. During the Challenge, you trade according to certain rules established by the prop company. The rules are related to money management, maximum loss, a minimum time to reach a certain percentage gain on the account, and others.

This is the period where you have to show that you have the skills to trade the firm's money and generate profits. The next stage is to get funding and start prop trading - becoming a prop trader.

How much does it cost to become a prop trader?

The only cost associated with getting funded is the cost of the Challenge. You risk nothing else and don’t have to pay any additional fees at any stage regardless of the results you achieve.

The cost of the Challenge depends on the amount you want to trade. Each prop firm determines the fee itself but it also depends on the type of Challenge.

Here are the approximate rates at the moment.

How to choose the best prop trading program?

There are many prop trading firms on the market, offering different features and challenge phase rules. The most important factors to consider are:

• History of the prop firm - Firstly, it is crucial to find a trustworthy, honest, and reliable prop firm. To achieve this, conduct some quick research. Look for comments and feedback from traders who have completed a Challenge at the firm. Ensure they pay out profits and there are no issues during trading;

• Time limit - the period within which you must reach the target to pass the challenge. Until recently, prop firms imposed a time limit, but this condition has recently been removed. In our view, trading is better without the added stress of a time requirement;

• Trading conditions - the conditions depend on the trading method, the percentage return required, the timeframe (if any), the maximum account loss, and the daily loss allowed. These conditions significantly influence your trading and decision-making. Additionally, very few traders, especially beginners, adhere strictly to the rules, so carefully review the terms of the prop trading program;

• Profit and payouts - some prop firms require a target profit of 5% to pass the challenge, while others may set a higher percentage - for example, 10%. The payout also varies widely and is determined according to the company's policy. As a standard, traders receive about 80% or more of the realized profit. Some prop firms pay out even 100% of their profits to their traders;

• Fees - since the prop company provides capital, it may charge a monthly fee, so review the contract terms carefully. This fee is separate from the evaluation phase fee. More crucial are the trading-related fees, such as spreads and commissions. Also, check if there are any withdrawal fees, for example.

Risks related to prop trading

Although there is a huge profit potential, prop trading is also associated with some risk - although not as much as standard trading. Since traders are not investing their own capital, but trading with the prop firms' money, they are obviously not risking their own money. They only risk the fee they pay to start the Challenge.

Another risk in prop trading comes from the prop firms themselves rather than the market. As with any industry, improper practices can occur, often driven by the desire for quick wealth. It's possible that the prop company may not fund you even after you have paid for and successfully passed the Challenge. They might also withhold your profits. To mitigate this risk, follow the steps outlined above, and if you have doubts about a particular company or difficulty finding a good prop trading program, it's best to contact us for assistance.

Personal or funded account

Many forex traders are already thinking about which is better - a funded account or a personal account. There are arguments in favor of both types of trading, let's take a closer look at the pros and cons of both options.

Pros of being funded

• Low risk - this is an account funded by the prop company, not by the trader. It’s usually a demo account, but it could also be a live account, depending on the firm’s terms and conditions. In either case, the trader does not risk their own funds. When trading with someone else's funds, you're risking their money, not your own. For instance, if you undertake a $200,000 Challenge for which you paid only $1,000 and incur a 20% loss, you've lost $40,000 of the prop firm's money while only risking $1,000. If the account were your own, you would have lost $40,000;

• Amount and profit - let’s be honest, the main reason people look into prop trading is the large accounts and high potential profits. Most traders do not have tens and hundreds of thousands of dollars to trade in the financial markets. Prop trading provides an incredible opportunity for traders to trade with accounts of $50,000, $100,000, $200,000, $400,000 or even $1,000,000. This enables more precise money management that is unthinkable with accounts with amounts of $500 - $1000. Big numbers mean big profits. If you manage to generate a 5% monthly return on a $200,000 account, that's $10,000 in profit. Even if you pay $1,000 to the prop firm, you're still left with $9,000. Do the same calculation on a $1,000 account;

• Less pressure - if we exclude the time limit rule, funded trading usually means less pressure because of the lower risk. Imagine losing $10,000 of your own money and compare the feeling to losing it on someone else’s account. Certainly, the mindset will be different, which in turn will help to make more logical decisions. Here I want to point out that the low level of stress also depends to a large extent on the trading conditions;

Cons of being funded

• Trading rules - prop trading goes hand in hand with strict rules regarding how to trade. From the prop firm's point of view, this is justified because, after all, traders are trading with their capital. This can lead to a change in the strategy of the prop trader and from there to a deterioration of the results. As I mentioned above, trading rules can increase the level of stress when they require you to make a certain percentage gain in a specific time; 

• Restrictions - prop firms can impose restrictions regarding the withdrawal of funds - the so-called payouts. This is done largely because of the hypothetical possibility of continuing to trade until the payout date comes and possibly not being able to withdraw - losing the profit. That's why I emphasized above, the importance of choosing a trusted prop trading firm;

• Scams - unfortunately, there are many fake prop trading companies. Since prop trading is a relatively new business model in its form, it becomes quite attractive to scammers as well. Although unregulated brokers where you trade your own funds are also not uncommon, that's a separate issue. The lack of regulation in prop trading amplifies the opportunities for these already resourceful scammers. This reminds the importance of conducting thorough research when selecting a reputable prop trading company.

Advantages of a personal account

• No need to obey trading rules - the main advantage of a personal trading account is that you have no restrictions on how to trade. You don't have a target or time to reach a certain profit. You can use whatever strategy you want and risk as much as you want. You can trade aggressively aiming for a higher profit or keep it safe and use a more conservative approach. You have complete freedom of action;

• No profit share - when trading own funds, you don’t have to share the profit with anyone; 

• Withdrawals at any time - when you trade on a personal account, no one tells you when and how much you are allowed to withdraw - it's your decision.

Disadvantages of a personal account

• Less initial capital - the primary drawback of a personal trading account is insufficient funds for effective and low-risk trading. With a small account, it's challenging to implement proper risk management strategies, which may lead to overtrading or taking on higher risks in certain situations. This concern is less relevant if you have millions in your bank account;

• Added risk - another disadvantage is that you are risking your own money. This also leads to a higher level of stress, which leads to more mistakes and ultimately losing the account. If you trade with a large account and lose it, it’s almost impossible to recover it, not to mention the psychological effect of the loss. If the account is relatively small, see the above point again;

• High pressure - trading own funds is much more stressful than prop trading. The fear of losing the account affects the decisions and the way of trading. The probability of making trades under the influence of emotions is much higher than prop trading, and emotional trading is the easiest and fastest way to blow your account.

If you have a small account but want to learn to trade and make significant profits, maybe a prop trading account is the better solution for you. If you have enough funds and want to be the master of your decisions, then a personal account is preferable. The decision depends on your goals and the capital you have available, so you should take your time and think about which is the best option for you.

Summary

Prop trading can be an exciting and potentially lucrative venture for traders who are willing to take the risk and invest the time and effort necessary to succeed.

Like any profession or business, it's essential to invest time in researching the market and identifying a reputable prop trading company you can rely on.

The most important is to decide whether prop trading is the right choice for you. 

FAQ

In case of a losing trade or a losing streak, will I get my account suspended?

• It depends on the overall loss. Your account will be suspended once you reach a certain percentage loss, not a specific amount of losing trades. 

Is there an extra fee if I pass the Challenge but then hit maximum loss?

• No. You only pay the challenge fee and nothing else.

Is account suspension within the trading restrictions?

• The restrictions are in terms of trading rules - time to reach profit target, max loss, and daily loss allowed, etc. Account suspension will occur if you reach maximum daily or maximum overall loss. In some cases, they can suspend your account if they detect improper practices.

What are the assets allowed to trade, and is crypto one of them?

• It depends on what assets the specific prop firm offers. Most often, all the assets that a standard broker offers are allowed for trading.

Is the challenge taken on a demo account? 

• Again, it depends on the prop firm itself. It could be either a live or demo account. In this case, this is not of significant importance.