Many day trading firms allow day traders to trade with a large capital pool given by them rather than day traders’ own money; thus, along with trading firms, day traders benefit as well. Questions like what is a prop firm, the structure of these firms, and how it is like to work for a prop trading firm may arise, which would all be answered through this article.
What is a prop firm?
A proprietary trading firm or prop trading company represents an organization ( bank or firm ) that invests directly on behalf of the financial firm’s trading account. Proprietary traders use a prop firm’s own money to buy and sell assets. Prop funds pay their traders based on a profit split commission plan.
What is prop trading?
Prop trading implies financial assets trading such as stocks, currencies, bonds, commodities, etc., with the firm’s own money. Thus, prop trading firms earn money from trading, not on behalf of clients and clients’ commissions.
A proprietary trading firm offers the structure in which traders get a part of their profit by using a prop firm’s capital. Such advantages give traders the freedom to trade on high leverage without spending their investment. However, along with such lucrative upside benefits, there are specific challenges for a day trader to work with a prop trading firm and fulfill the eligibility criteria.
Working for a Prop Trading Firm
A day trader works with a day trading prop firm as a contractor, which means he is not a full-time employee. As they do not work as employees, they do not get hourly wages, salary, or other benefits. Instead, they get paid when they make a profit, which sometimes can take weeks or months.
Day traders in a prop firm deal in the equity market, options and futures market, forex market, and much more; the purpose is to profit by trading. The good thing here is that a day trader in this structure has just the company they are trading as the client. As the primary focus here is to generate profit, a day trader is least concerned with how well a stock is fundamentally and where it would be in the future. An important point to note here is that traders in prop trading firms are not brokers or financial advisors; they are independent contractors.
There are various types of day traders in this setup. For example, a few traders focus on significant gains and take limited trades, whereas traders make hundreds of traders daily. However, these trades are not substantial. In addition, some traders trade only for a specific hour in the day. So, depending on the choices and willingness, the nature of day traders varies.
Many day trading prop firms give their day traders liberty to work from the office and home. Day traders have to go through training, but they might be given the freedom to work from home after a point in time. Most works from home day traders have years of experience and successful history of profitable trades; many are also hired for the same reasons.
Working for a prop trading firm as a contractor – example
The first step in my trading career is working for a prop trading firm. Of course, if the trader doesn’t have $100 000 capital, it is tough to make a monthly return to pay bills and feed the family as a professional trader. But, in that case, the trader can trade others’ company money, learn trading skills, share knowledge from other traders, etc. One of the most famous day trading prop firms is SMB Trading. Mike Bellafiore is the Co-founder of SMB Capital.
This company decided to be a transparent and public, social networks active company. Using their SMB capital youtube channel, they reveal some trading secrets, traders’ hiring process. Their best traders share their knowledge with the internet community.SMB prop company offers training and trading products for new and semi-experienced traders.
What are the Benefits of Day Trading Prop Firms?
You can get certain benefits while working for a prop trading firm; some are listed below.
- Better chances of networking with other professional traders.
- I have the power to trade with a large pool of capital.
- Less amount to be paid as a commission compared to retail day traders.
- The cost associated with trading is also lower compared to trading as an individual.
- You might have to pay to train as a prop firm day trader, but you get the best in class training to become a professional day trader.
- You also don’t have to keep the minimum balance of $25,000 for day trading stocks.
Are There Any Shortcomings of Prop Firms?
The grass looks greener on the other side, but everything that has a good side has a dark side as well. These are the shortcomings of working for a prop trading firm.
- Prop firms are moving online to benefit from the less expensive options. Unfortunately, as a result, you may not get the chance to network with experienced day traders, and the online learning experience doesn’t give much leverage. Many online tools provide a live experience, but nothing is great compared to sitting in the same room while day trading.
- There is high competition in this field, which you may have to face.
- Unlike earlier, retail traders now have access to high internet speed and the latest trading tools, making them fierce competitors of prop traders.
- No doubt, retail day traders have a higher commission to pay; they can negotiate a better rate with brokers, which is impossible for prop traders.
- Many firms also charge software access fees, rental fees, marked-up commission, to day traders, along with taking a certain percentage of profit from them. It can cost day traders a lot when combined.
Training may not be necessary for experienced traders, so they should look for prop trading firms that lure them with lesser costs. However, day traders hoping to join a prop trading firm full time by quitting their job need to keep in mind that this is not an easy task, and generating profits would take time, even months. Thus, better to first keep some reserve aside for yourself before diving into this field full time.
Forex prop firms list
Below are presented best proprietary trading firms and remote trading firms list:
- FidelCrest
FidelCrest is probably one of the top prop trading firms known for its excellent pro trading values and principles. The process of becoming a part of this well-established fund begins with evaluation. Profit share is evaluated for the verification phase. It is expected to elevate capital to up to $800k within one year. FidelCrest has a strategy of keeping 80% of the attained profit. News event-related trading is allowed, and traders are allowed to hold positions overnight and on weekends. If 49 € are invested, then 50 K balance is expected to attain whereas 200 K is received for 849 euros. - FTMO
Almost all of the prop trading firms operate and function on a similar strategy and fundamental principles. Practically identical to Fieldcrest, FTMO keep 70% of the total profits. However, they require the traders to complete a beginner challenge followed by verification fees which result in a funded account. If the balance is positive, then FTMO grants free retest. Traders have the option to use the expert advisor, which is foreign exchange software that guides about the potential trades, and automatically takes the initiative for investment, and performs trade functions through automatically set programs. Apart from EA, traders can acquire guidance to minimize the loss of capital through hedging. FTMO works on the principle of trade execution by automatically setting programs, allowing the traders to execute investment options to provide maximum trade discretion. - TopStep FX
It has a 200k buying power for around $125 monthly and a 500 K buying power for $275. As traders, you have the liberty to own an initial $5000 and 80% more after acquiring more profit. It also works and functions in a two-step verification and evaluation process. TopStep also uses expert advisory but does not deal with hedging; it can provide MT4 only. MT4 is a meta-trader platform free of cost, and it offers technical analysis options and a consistent trading system for traders. - The 5%ers
The 5%ers is a small prop trading company where beginner traders can start from $50K and manage a portfolio extensive above 1 million dollars. Excellent The growth trajectory and potential for this platform are consistent and aggressive. They select traders through a complex evaluation process that involves real-life trading accounts. Traders are asked to utilize their financial tools, instruments, and expert advisory with no limitations. Traders are expected to hold their positions during weekends, overnight as well as news events. However, one of the advantages of using this platform is that there is an availability of half profit-sharing so that traders can keep 50% of the profit. - City Traders Imperium
City Traders Imperium – Traders are evaluated and verified through a real-life trading account and allowed to use expert advisory, minimize capital loss through hedging and hold trade through occasions and weekends. It has one of the most appreciated and flexible trading hours and strategies that accommodate traders of all backgrounds with a 50/50 profit share. - AudaCity Capital – beginner traders manage $10 000 live accounts.
- SMB trading offers and forex and stocks.
Proprietary Trading Firm Legal Structure
There are two types of structures for proprietary trading firms, as stated below.
1. No Capital, Profit Sharing Structure:
In the first structure, the prop firm takes a part of your profit, typically between 20 percent to 50 percent, as their shares. However, the trader here has to put no capital out of their own pockets in trading. As stated earlier, traders have to pay for their training, though.
Based on your experience and skills, the prop firm would provide you with trading capital. Day trading prop firms would also ask you to deposit a certain amount to safeguard themselves from losses made by you.
In this structure, prop firms earn the profit share taken from day traders. As a result, commission charges are low here, which allows traders to make more money. In addition, these prop firms may charge software or rental fees. This kind of prop firm model is quite popular in Canada and many other parts across the globe.
2. No Profit Sharing, Capital Requirement:
In this structure, the prop firms do not ask for higher profit margins, and traders keep 90 percent or even 100 percent of their profits. But this is possible as here traders have their own money to trade. If you have thousands of dollars in your hands, you can opt for this structure. Prop firms leverage your capital, and as a result, you can trade on a higher amount than you have with you.
Prop firms and day traders
These prop firms charge day traders higher commissions, training fees, software fees, seat fees, etc. In the United States, this type of day trading prop firm is very famous.
The financial marketplace and trading of assets can be performed through various practices. Traders and investors who perform on forex by investing and utilizing stocks, currencies, international commodities, bonds, and other financial tools through assistance from a particular form then that concept is known as prop trading, which is contrary to a hedge fund. The latter use the depositor’s money or the client’s assets to profit and generate revenue. The trading or investment of any financial derivative is performed with a firm’s money and not the capital of particular clients or depositors. In the end, the benefits are earned for the firm itself, and this type of trading is beneficial for trading prop firms. Profit is learned through different resources using various financial channels such as arbitrate strategies, fundamental analysis, or another form of financial tech technique that help generate returns for the firm. However, choosing the right kind of prop trading is challenging and overwhelming, particularly for beginners who have just stepped into the world of liquid assets. For those looking to generate maximum profit and minimize the risk of financial losses, investing in the right kind of prop trading firm is a suitable option. Prop traders are known to accumulate an average salary of $125 403 per year in the United States, provided if the funded trading accounts are reliable. There is a minimum risk of losing capital and, at the same time, allow you to generate maximum liquid cash. Therefore if you want to avoid the risk of losing money, then as a beginner investing in a funded program is appropriate. Generating revenue under the rules and strategy set by another company and making the most of their financial assets and capital is bound to push beginners and young traders. As far as their software are concerned, they have the most well-established software systems and insights to advise beginners to make crucial decisions.
Conclusion
There are instances where a day trader can be offered salary and bonuses, just like an employee, along with the training. This is prevalent in a financial or commodity company having a separate trading floor. This job typically has 8 to 12 hours daily. Prop traders work for very little time, primarily from home day traders; they work for less than three hours daily. It is significantly less than the day traders on a trading floor, but both have pros and cons.
Although it may be considered risky, prop trading generates the most profit, similar to commercial or investment banks. Increased yield is one of the benefits of investing and trading with a prop form. However, the entire benefits package is targeted to the firm. If you are a prop trader, the bank will acquire most of the profits from the performed trade. Most of the trading prop forms keep a profit between 50 to 80%. There are comparatively lesser emotions, prejudice, and discrimination amongst readers. They do not utilize and invest their assets, contrary to regular trading, as traders use their own money. Prop traders are expected to submit an initial fee or go through a one or two-time evaluation process to become a part of the prop trader’s community. They can work remotely, but once thriving, they can be provided with an office.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
