What Is The Difference Between Prop Trading And Other Forms Of Trading?

Key takeaways

• Prop trading provides access to capital that retail traders may not have

• Prop traders can take larger positions and assume more risk than retail traders

• Prop traders must be aware of market volatility and manage risk accordingly

Key differences between prop trading and other types of trading

In the table outlined below, you can find the most relevant differences between prop trading and other kinds of trading:

Benefits of prop trading

Prop trading offers traders a unique set of advantages compared to other trading methodologies. These benefits not only enhance the trader's capabilities but also create an environment conducive to maximizing potential returns.

• Access to Capital: One of the most significant benefits of prop trading is the access to the firm's capital. This is a notable edge over retail traders who might be limited by their personal finances. With the backing of a firm's vast financial resources, prop traders can take positions that would be unattainable with their own capital. This increased buying power allows them to capitalize on opportunities that might be out of reach for individual traders, thereby potentially magnifying their returns.

• Freedom: Prop traders enjoy a heightened degree of freedom in their trading decisions. Unlike traders in many institutional settings who might be bound by specific mandates or strategies, prop traders are often given the autonomy to choose their trades. This freedom allows them to adapt to changing market conditions rapidly and to pivot their strategies as they deem fit, fostering innovation and adaptability.

• Potential for High Rewards: The financial model of many prop trading firms is designed in a way that prop traders can keep a substantial portion, if not all, of their profits. This arrangement can be incredibly lucrative, especially when combined with the firm's capital and resources. The potential to earn significantly is enhanced, making prop trading an attractive option for those who are confident in their trading skills and strategies.

These benefits provide prop traders with the tools and incentives they need to thrive in the fast-paced world of financial markets.

To learn more advantages and disadvantages of proprietary trading companies, and how their work is organized - read the article: Proprietary Trading Explained

Drawbacks of prop trading

Prop trading does have disadvantages as well, and some of the main ones are:

• 1

  The high risk associated with it: Prop traders must be aware of the volatility of the markets and be prepared to manage their risk accordingly. This can be a difficult task, especially when the markets are volatile or unpredictable.

• 2

  Pressure: Prop traders may be under pressure to perform well, as their profits are shared with the firm. This can create a lot of stress and anxiety, as traders must constantly be aware of the markets in order to make the right trades.

• 3

  Long hours: Prop traders may be required to work long hours, as the markets are open 24 hours a day, 5 days a week. This can be a major strain on the trader’s physical and mental health, as they are often required to stay up late or wake up early in order to monitor their trades.

If you’re interested in prop trading, we have a guide on prop trading benefits that you may find useful.

Who is prop trading suitable for?

Although prop trading carries with it a high risk, it is suitable for traders who have a proven track record of success, a high risk tolerance, and the ability to work independently under pressure. Prop trading strategies allow traders to benefit from short-term market movements and make profits quickly, without having to wait for the market to become more liquid.

To succeed in prop trading, traders must have a comprehensive understanding of the markets they trade in. They need to be able to make quick decisions and adjust their strategies based on market fluctuations.

Traders must also be aware of the risks they are taking and be prepared to accept losses when necessary. Additionally, traders need to be able to manage their capital effectively in order to maximize returns and minimize losses.

If you want to work with a prop trading company, you will find it helpful to learn how you can prepare yourself in the article: Top 9 Tips For Successful Prop Trading Interviews

Best Prop trading firms

1

9.4/10

Go to broker

Your capital is at risk.

Minimum deposit:

$1

Review

Topstep is a leading proprietary trading firm offering traders the opportunity to trade futures contracts. With a unique two-step evaluation process, traders can prove their skills on a simulated account before potentially receiving funding for live trading.
Topstep offers three account sizes: $50,000, $100,000, and $150,000. Regular pricing starts from $165/month, with frequent discounts available. Traders can leverage up to 1:100 and access diverse futures markets, including stocks, commodities, crypto, bonds, and metals. Commissions and fees charged on the Trading Combine (simulation account) align with those on a live funded account, helping traders develop skills for real markets.
Topstep supports traders with educational resources, including free group coaching, to enhance their chances of success.

Pros/Cons

•Real trading accounts are financed by a broker, there is no need to invest your funds in trading.

•The company provides a wide range of free training materials, including free group coaching.

•You can contact the support team using several convenient methods.

•The broker offers a referral program for extra income.

•The company doesn’t offer bonuses, automated trading, or other passive income options.

•The support service works only on weekdays during set hours.

Study Review

2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

€155

Review

FTMO is an international proprietary trading company created in the Czech Republic in 2014. The platform brings traders into its fold and after traders successfully pass a two-step testing regime, FTMO transfers 400 thousand dollars to the trader’s account. Transactions are monitored by FTMO to grow the deposit. There is a payment of 80% at the first stage of real trading. The 90% Profit Split is available only to those FTMO Traders that have reached Scaling Plan. The company works in full accordance with European financial legislation and is under the local regulator.

Pros/Cons

•Quite low testing cost is €155.

•Classic platforms such as MT4, MT5, and Ctrader are familiar to many traders. For these platforms, hundreds of indicators, scripts, and advisers have been developed.

•The starting reward is 80%.

•Diversification of tariff plans. Candidates can choose a demo deposit from 10 thousand to 200 thousand US dollars. There are tariff plans that span from standard to aggressive trading.

•Leverage is up to 1:100.

•Strict requirements for the test period. The allowable maximum loss is 10% of the deposit amount. The target profit is 10%, for which 1 month is provided.

•There is no information about how the company is funded.

Study Review

3

9.1/10

Go to broker

Your capital is at risk.

Minimum deposit:

$119

Review

Funded Trading Plus clients trade CFDs on currency pairs, indices, precious metals, energies, and cryptocurrencies. There are 18 programs with one- and two-phase challenges, or without evaluation. These programs also differ in initial fees, profit targets, maximum total drawdown, and other criteria. Traders can receive from $5,000 to $200,000 under management upon successfully passing the challenge or immediately if they choose the program without evaluation. Scaling up to $2,500,000 is available. The profit split is 80%/20% at the start and 90%/10% or even 100%/0% later. Traders work on MetaTrader 4 and MetaTrader 5. Leverage is up to 1:30.

Pros/Cons

•Wide choice of programs with universal parameters and acceptable requirements;

•One-time initial fee, refundable for programs with one- and two-phase challenges. No monthly subscription;

•Simple and understandable conditions, no hidden obligations, and profitable trading split;

•The prop firm partners with Eightcap and ThinkMarkets. It offers spreads from 0 pips and low trading fees;

•A demo account with $100,000 in virtual funds is available for exploring the trading process and instruments;

•24/7 technical support is provided via four communication channels;

•Deposits and withdrawals are made with Visa, Mastercard, bank transfers, and crypto wallets without fees.

•The Master program without evaluation is very expensive — a non-refundable initial fee of $4,500 is required for the balance of $100,000;

•Funded Trading Plus offers only CFDs without real assets or futures;

•The firm’s website contains much information, but some important nuances, like the reset fee, are not provided.

Study Review