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First Of All, What is a Prop Trader?
A Prop Trader is someone who trades with either a financial firm's capital or with other people's money. Proprietary trading firms provide capital to their traders to make profits, and the profits are shared with the company according to a predetermined agreement. Prop traders usually specialize in a particular market or asset, such as stocks, options, ETFs, commodities, FX currency pairs, and futures contracts. They utilize the firm's capital and trading tools to develop successful trading strategies in order to receive a portion of the profits generated through their day and swing trades.
Prop trading firms typically do not provide a fixed base salary to their traders. However, some firms may offer a small monthly salary to help their traders concentrate solely on achieving excellent trading outcomes. Nevertheless, these traders are usually required to give a predetermined percentage of their monthly earnings as a profit share to the company. Generally, most prop trading firms provide a profit split percentage between 25% and 50%, although some firms may offer a higher profit distribution of up to 75%.
What's The Process to Become a Funded Trader?
Nowadays, it's easier and more affordable than ever to become a prop trader. Numerous remote trading firms offer services to online traders, enabling them to trade from anywhere using the firm's tools and guidelines. To become a funded trader, you'll need to apply for a funded trading program by completing an application form and disclosing your background, education level, and trading experience to the prop firm. Depending on the firm, you may need to attend an interview to discuss your trading skills, experience, preferred market, and desired trading strategy. After being accepted by the prop firm, you can begin your evaluation period, which typically lasts between 30-60 days on most online proprietary trading firms. During this time, prop traders must demonstrate their ability to generate profits and fulfill the company's requirements to progress to the next level. As a prop trader, it's important to emulate the trading practices of professionals, unlock your innate talent, and acquire the knowledge and skills necessary to trade the markets confidently and effectively, starting from beginner to advanced levels. This will help you develop the critical techniques and strategies you can apply to your trading immediately.
How Much Money Do Prop Traders Earn?
The burning question is how much a prop trader can earn, right? Salaries for prop traders vary across different countries and are mostly determined by the trader's performance. In prop trading, bonuses are the primary source of compensation. Since prop traders receive a share of their profits from the prop firm, their earning potential is theoretically unlimited. According to Comparably, prop traders in the United States earn between $42,373 and $793,331, with a median salary of $203,679. The average salary for a proprietary trader is $90,566 per year, according to ZipRecruiter.
How Do I Build My Career as a Proprietary Trader?
There are various ways to enter the prop trading field, and having a bachelor's degree is not always necessary. With the advent of remote work, there are now more options available, including:
Option 1 - Receive A Funded Trading Account
Some trading programs offer online funded trading accounts, where traders can potentially receive a proprietary-funded account with the firm's capital. After qualifying and meeting the prop firm's requirements, the trader gains access to a fully funded account with a specified account size and the firm's resources. During the evaluation period, traders must follow certain conditions and risk management rules and guidelines. Funded trading is an excellent option for starting a trading career since it enables you to enter the markets without any capital risk while keeping most of the profits.
Option 2 - Proprietary Trading Firm
The most conventional way to become a prop trader is to earn a bachelor's degree, look for a reputable trading firm or investment bank with positive reviews, and apply. Top prop trading firms usually have an internship period of 6-12 months, during which they provide training and mentoring. Traders are not required to maintain a profitable account balance during the training period, but they must learn the risk management rules, gain market expertise, and develop a trading strategy and style. Professional trading firms generally expect their prop traders to become profitable six months after starting their internship.
Option 3 - Find Investors and Get Trading Capital
Another way to become a prop trader is to find investors willing to fund your account independently. However, you typically need a proven track record to show potential investors that you can generate profits for them. This method involves connecting with large investors or hedge funds and obtaining capital through different networks.
7 Main Areas to Consider Before Becoming a Proprietary Trader
If you're interested in becoming a proprietary trader, there are several things you should consider before making a decision. Here are seven factors you should keep in mind:
1. The Monthly Fee
Most prop trading firms charge a monthly fee for using their capital and accessing their platforms and real-time data. This fee ranges from $100-$150 per month, and some platforms also charge a one-time payment of $100-$1000.
2. Profit Split
Prop trading firms typically offer a 50%-50% profit split, but some may offer a higher share percentage of up to 75%.
3. Trading Guideline and Risk Management Rules
Every trading firm has different rules and guidelines for trading, such as maximum daily drawdown, overall drawdown, maximum transactions per day, daily and overall profit target levels, trade restrictions per market or asset, and more. It's important to carefully examine these guidelines to see if they align with your trading strategy.
4. Trading Fees
Consider the trading fees and costs charged by the prop firm, especially if you make a lot of transactions in one trading day. Ask about platform fees, trading fees for specific markets, and any hidden fees or costs.
5. Scaling Plan
Look for a prop trading firm that offers a scaling plan, which allows you to increase your account size based on your success.
6. Basic Income
Some prop trading firms offer a base monthly salary, but it's generally low and can impact your profit-sharing agreement. If you need a stable income, you may need to work at a traditional prop trading firm.
7. Credibility
Make sure the prop trading firm has good user reviews and a positive reputation. Check the company's website, terms and conditions page, and TrustPilot to learn more about their services.
Pros and Cons of Being A Prop Trader
As with any profession, becoming a professional prop trader comes with its own set of advantages and disadvantages. It's important to weigh these factors carefully in order to make an informed decision and have a smooth start in the field. Here are some of the main pros and cons to consider:
Pros:
- Entry requirements are relatively easy
- Potential for high earnings
- Exciting job with access to large sums of capital, technological resources, and financial services
- Traders face no risk of capital
- Low trading fees
- Opportunity to develop trading skills and learn about personal psychological strengths and weaknesses
- Many prop trading firms offer rebate programs
Cons:
- High level of competition
- Generally no basic income
- Highly stressful job
- Proprietary trading has become more challenging due to automated trading machines and high-frequency trading (HFT)
- Some trading firms charge high monthly fees.
Final Thoughts
To sum up, becoming a proprietary trader is a straightforward process. You only need to find a trustworthy prop trading firm that provides a funded trading account and begin your application. During this process, you must consider various factors such as the account size, profit split percentage, trading tools and platforms offered by the firm, and the monthly fees charged by the prop firm. Once you have completed the application process, you can focus on enhancing your trading skills with the support of the firm's mentors. Trading is difficult, and it may take some time to become a consistently profitable prop trader. However, having access to a funded trading account is perhaps the most accessible way to become a professional trader and establish a career as a trader.
Frequently Asked Questions (FAQs)
Are qualifications necessary to become a proprietary trader?
Generally, a college degree or specific qualifications are not required to become a prop trader. Proprietary trading firms usually seek diversity on their team, so each individual typically has a different background and experience.
How can one enter prop trading?
There are various ways to enter prop trading. One option is to search for a reputable prop trading firm, apply for a job, and start an internship if accepted. Alternatively, you can use a legitimate online proprietary trading service like the ones that we have listed within our website here to obtain a funded trading account.
What is the goal of proprietary trading?
For financial firms, hedge funds, and individual investors, the primary aim of proprietary trading is to utilize the company’s capital and other technological resources to execute an overall profitable balance sheet. They do not have any clients, and the only objective is to generate profits.
From the perspective of exchanges and financial market regulators, the purpose of proprietary trading is to add liquidity to the markets and develop a functioning market. Many prop trading firms receive monthly rebates from exchanges, which are proportionally given to their prop traders in return for adding liquidity to the market.
How does a hedge fund differ from a proprietary trading firm?
The key difference between a hedge fund and a proprietary trading firm is that the former uses investors' capital to generate profits, while the latter trades and invests with its own capital.
