If you’ve ever dreamed of being a professional trader and operating like a true market whale but don’t have the necessary funds to do so, a proprietary trading firm is what you’re looking for. A prop trading firm is a company that provides its traders with access to capital, allowing them to trade larger positions and increase their trading profits.
What is prop trading? As a trader with a proprietary trading firm, you’ll gain access to simulated capital, enabling you to trade like a professional using the company’s funds without risking your own money. However, in exchange for assuming the risks on your behalf, funded traders share a percentage of their profits with the company (this is known as profit sharing, with the industry average being 80:20 in favor of the trader).
How Does Proprietary Trading Work?
Generally, a prop trading firm selects its traders based on their skills, risk management capabilities, and market performance. To do this, companies test the users’ trading skills through a Trading Challenge before officially joining the program and receiving funding.
When a trader passes this Trading Challenge, they are accepted by the company and allocated a certain amount of capital to trade with. The size of this capital allocation, as well as the proportion of profits the trader is entitled to keep, usually varies depending on the trader’s level of experience and track record.
From this point on, traders make the leap towards professionalism. However, similar to the Trading Challenge, traders must always stay within the maximum loss limits set by the company. If a trader’s losses reach this predefined threshold, the company will intervene and suspend the trader’s trading activities to prevent further financial risks.
It’s important to recognize that although the entire funding and trading environment within proprietary trading firms is typically simulated, all market data and trading profits are completely real. For this reason, to enhance the trading experience, these companies often operate in real accounts with their own capital, using data from simulated trades executed by their traders. ok