Prop trading accounts pros and cons
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Investing in the financial markets can be an attractive career option for individuals with a passion for finance and a desire to build a successful career in this field. However, gaining access to the financial markets and trading can be challenging, especially for those who are new to the industry or lack sufficient capital to invest. This is where proprietary trading firms, or prop firms, come into play. Prop firms offer traders access to capital, technology, and resources to trade the financial markets. But the question arises, should you join a prop firm? In this article, the experts at TU will examine the pros and cons of joining a prop firm, and discuss the factors that you should consider before making this decision.
Before deciding whether to join a prop firm, сonsider factors such as:
Firm's track record, trading strategies, and training programs
Your own trading goals and risk tolerance
With the right research and preparation, joining a prop firm can be a rewarding career path
What is prop trading?
Proprietary trading, also known as prop trading, involves buying and selling stocks and other securities using a firm's own funds. The objective of prop trading is to speculate in financial markets for profitable opportunities, using funds that are often invested in a security and may be illiquid. This type of trading involves taking on risks, with little or no client business to rely on if trades go wrong.
It is important to note that prior to the 2008 financial crisis, proprietary trading in the United States was largely unregulated. However, it was identified as a significant source of excessive risk-taking that led to the collapse of some prominent financial institutions. So, the Volcker Rule was introduced to prohibit banks from engaging in proprietary trading. However, it does allow them to create securities markets for their clients, as long as any profit from those trades is excluded.
What is Prop Trading?How can you become a prop trader?
Prop trading firms have emerged in recent years, providing an accessible and cost-effective path for aspiring prop traders. These online firms allow traders to trade from anywhere in the world, equipped with necessary resources and tools for success.
To become a funded trader, interested individuals must apply for a funded trading program by submitting a form that outlines their educational background, trading experience, and other relevant details. Depending on the prop firm, an interview may be required to discuss trading skills, experience, preferred market, and trading strategies.
Upon acceptance, the evaluation period typically lasts between 30 to 60 days, during which traders must prove their profitability and meet the firm's requirements to progress to the next level.
Being a successful prop trader requires a thorough understanding of the financial markets, discipline in managing risks, and the ability to continuously learn and adapt to market changes. Traders must also handle the pressure of trading for a living.
How to choose a prop trading account?
When it comes to choosing a prop trading account, there are several factors to consider. Here are some of the key variables to keep in mind, as suggested by our experts:
Profit Split/Profit Share: Look at the percentage of profits that the trader gets to keep. Choose a firm that offers a higher profit split or more favorable profit share arrangement.
Evaluation process: Consider the evaluation process that determines whether the trader is eligible for funding from the prop firm. Choose a firm that has a transparent and fair evaluation process.
Available markets: Look at the variety of markets that the firm offers. Choose a firm that specializes in the markets you're interested in or offers a wide range of markets.
Available leverage: Evaluate the level of leverage that the firm provides. Choose a firm that offers the appropriate level of leverage that suits your trading style.
Available customer support: Good customer support is essential for any trader. Choose a firm that offers responsive and helpful customer support to address any questions or issues that may arise.
Reliable trading platform: A reliable trading platform is crucial for executing trades effectively. Choose a firm that offers a stable and user-friendly trading platform with a variety of tools and features.
Pros and cons of prop trading
Proprietary trading can offer significant advantages for traders looking to enter the financial markets. However, it is also important to consider the drawbacks of prop trading. Our experts have specifically highlighted the following pros and cons to keep in mind:
👍 Pros
•Access to significant trading capital: Prop traders can access significant trading capital from the firm, which can potentially lead to higher profits than trading with their own small account.
•Reduced risk: Traders are not risking their own money outside of evaluation or entry fees, making it less risky to start trading.
•Built-in risk controls: Prop firms have built-in defense mechanisms that limit potential losses to prevent traders from losing more than 5% of capital on any given day. There is also a maximum overall loss of around 15%, ensuring that the funded account is taken away if these limits are hit.
•Regular withdrawals: Weekly payouts from profits make it easy to withdraw earnings and trade more comfortably.
•Diverse markets: Prop traders can trade in a variety of global financial markets, including stocks, Forex, gold, oil, cryptocurrency, and indices.
👎 Cons
•Limited trading strategies: Prop firms have strict trading rules that may limit the trading strategies available to traders.
•Risk of evaluation failure: Failure to adhere to prop firm rules may result in evaluation failure or loss of funding, which would require payment of evaluation fees again.
•Hard cap on account growth: While some firms offer a scaling account size, there is still a hard cap on account growth, unlike theoretically unlimited growth when trading on your own.
•Strategy replication: Profitable trading strategies may be copied by the prop firm, meaning traders may have to share their strategies with others.
In conclusion, prop trading has its advantages and disadvantages. Traders need to carefully evaluate these factors to determine if prop trading is the right path for them.
Best prop trading accounts 2024
There are several different trading accounts to choose from, each with their own unique set of advantages and disadvantages. To help you choose the best trading account for your needs, the experts have listed the top prop trading accounts available in 2023, including the pros and cons of each:
Topstep
Topstep is an industry leader that offers a funded trader program to traders. They offer traders access to significant trading capital that can lead to bigger profits compared to a small account. Topstep encourages beginner traders to learn risk management with built-in risk controls. Traders can withdraw regularly, receive trader development, and have access to multiple trading platforms. However, Topstep may limit trading strategies available and profit shares are not as high as some other firms.
Earn2Trade
Earn2Trade has three different funded trading programs that traders can choose from. Each program requires traders to comply with the rules and reach the profit target to receive a guaranteed funding offer. After completion, traders receive an offer for a funded trading account. Earn2Trade provides access to various trading platforms and offers traders an 80%/20% profit split. However, there are no free trials available, and traders must pay a monthly fee for the program.
FTMO
FTMO is a Forex trading prop firm based in Prague, Czech Republic. They offer traders a 3-step process to qualify for a funded trading account, and once traders pass the evaluation, they can trade with the firm's capital. Traders can trade in multiple markets and have access to popular Forex trading platforms. The profit split is 80:20, and the trader can keep 80% of profits to withdraw. However, FTMO may charge a higher fee for their evaluation process.
FAQ
Is joining a prop firm worth it?
According to experts, joining a prop firm can be worth it as it provides access to significant trading capital and can help traders learn risk management skills. However, it also has some drawbacks such as limiting trading strategies and profit sharing that must be considered.
Should I work at a prop trading firm?
Whether or not you should work at a prop trading firm depends on your personal career goals and preferences. Analysts suggest that it can be a good option if you enjoy high-risk trading and want to work with a team of experienced traders.
Is it hard to get a job as a prop trader?
Yes, it can be challenging to get a job as a prop trader as the competition is high and many firms have strict requirements for their traders. A strong background in finance, a proven track record of successful trading, and knowledge of financial markets are typically required.
How much can I make from a prop firm?
The amount of money a trader can make from a prop firm depends on the firm's profit sharing policies, the trader's skill level, and the markets they trade in. Some firms offer a higher percentage of profits to successful traders, while others may have a fixed payout structure.
Team that worked on the article
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).