Prop trading is a type of investment in which a trader trades with company funds. At the same time, the profit is divided in accordance with the agreement (most often in half), and the trader covers the losses with his own funds at the expense of a security deposit.
In fact, proprietary trading is a kind of trust management in which the company gives funds to the trader and, at the same time, does not risk anything. You can lose your thousand dollars, but the company can only earn.
Standard conditions for concluding an agreement with a prop company
The conditions for concluding contracts vary depending on the company. Let’s analyze the basic principles that are approximately the same for different market participants.
Most prop companies share the profit received by the trader 50/50, however, there are exceptions. Most often, these are young and not yet the most famous market participants who are trying to win back their part of the clientele with the help of marketing. The amounts that the company adds to the trader’s own funds can be either 2 times more or 10 times more than the security deposit.
Today there is a large number of Forex prop firms, the most trusted of which are:
- Topstep Forex
- FTMO
- BluFX
- Fidelcrest
- Funded Trader
- The 5%ers
Usually, the practice of concluding contracts with novice and experienced traders by prop companies differs. Beginners are offered paid training (standard practice), after which he trades under the guidance of other, more experienced colleagues. This continues until a person shows stable financial results in his trading.
Experienced traders are asked to show trading account statistics for a certain period to confirm their professionalism and experience in the field of online trading. This information must be certified by the broker. Some companies ask you to provide an investment account password.
Pros and cons of prop trading
The main advantage of prop trading is accessibility and the opportunity to start a career in the foreign exchange market for an absolute beginner, but you need to pay a rather large amount for training. You can do the same in a third-party training center, but usually, the courses involve a certain theoretical part and several practical exercises, after which the trader is left face to face with the market. In prop companies, trading continues under the guidance of a mentor.
The opportunity to significantly increase your earnings at the expense of the prop company is not so much an advantage as a prospect. This works only for those traders who trade stably, they do not have large drawdowns, they often make a profit than a loss and the company they have chosen increases the trader’s deposit at least 4 times.
The disadvantage of prop trading is that it increases the risks. Even if the company doubles your deposit, you proportionally increase the lot and, therefore, the risks. If your transaction turns out to be unprofitable, the losses will fall only on your capital, which is less than 2 times the amount that you pledged to calculate the lot.
In general, prop trading is an interesting phenomenon in the field of currency trading, but it is not suitable for everyone. It is convenient to work in prop companies for novice traders without capital but with a good trading strategy at the stage of accumulating funds for independent trading.