Prop trading can be a good career choice for individuals who thrive in a fast-paced, high-risk environment and possess the necessary skills and qualities. It offers potential high earnings, independence, and valuable skill development. However, it may not be suitable for everyone due to the intense competition, inherent risks, and uncertain job security.
Is prop trading beneficial?
Updated: October 02, 2023
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Proprietary trading, commonly referred to as prop trading, is a highly intriguing career path within the financial industry that involves trading financial instruments with a firm's own capital, rather than client funds. It offers individuals the opportunity to engage in fast-paced, high-risk, and potentially lucrative activities within the markets. This article aims to explore the question of whether prop trading is a good career choice by examining its top pros and cons.
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How to get into prop trading?
Experts suggest focusing on the following aspects to get into prop trading:
Education: Aim for an undergraduate or Master's degree in fields such as math, physics, statistics, computer science, or engineering from a reputable institution. While attending a top-tier school is advantageous, it is still possible to enter prop trading from a lower-tier university with a strong technical program, such as a well-regarded public state school in the U.S. that holds a good engineering ranking. While good grades are beneficial, they are not as crucial as they are in investment banking recruitment
Experience: Most entry-level traders in prop trading positions come directly from degree programs without significant full-time work experience. However, it is essential to have relevant internships in trading, asset management, or other areas related to the public markets. These internships demonstrate your exposure to the industry and your practical understanding of trading operations
Qualities: Entry-level prop traders must possess several key qualities. They need to think quickly, remain composed under pressure, have a resilient attitude, and promptly rectify any errors. If you tend to become easily stressed by tight deadlines and time pressures, prop trading may not be the suitable career choice for you. It's important to cultivate a mindset that thrives in high-pressure situations
Networking: Networking plays a crucial role in prop trading recruitment, especially if you are attending a non-target school. Utilize platforms like LinkedIn to identify prop trading firms and professionals in the industry. Take the initiative to reach out to them through email, introducing yourself and expressing your interest in their careers. Leverage informational interviews and seek advice from professionals already working in prop trading. Building a network can open doors to opportunities and provide valuable insights into the industry
Build a track record: As an undergraduate, focus on building a track record that demonstrates your passion and competence in trading. Gain internship experience to understand the practical aspects of trading and asset management. Additionally, consider trading your own account to develop hands-on experience and refine your skills
Pros and cons of prop trading
What is Prop Trading? Top Pros and Cons👍 Pros
• Leverage: One of the significant advantages of prop trading is the ability to utilize leverage. Proprietary trading firms often provide traders with access to substantial amounts of capital, allowing them to amplify potential returns. With increased leverage, traders can take larger positions in the market, potentially leading to higher profits
• Reduced commissions: Prop trading firms often negotiate lower commission rates with brokers due to the high trading volumes they generate. This can result in reduced transaction costs for traders, enhancing their overall profitability
• Surrounded by professionals: In prop trading, you get the opportunity to work alongside experienced and knowledgeable professionals. Such an environment can provide a valuable learning experience and facilitate the exchange of ideas and strategies. The collaborative culture allows for continuous skill development and exposure to different trading approaches. Maybe, you also can be interested in information about pros and cons of collective trading
• Access to training: Proprietary trading firms usually offer training programs to their traders. These programs can include mentoring, educational resources, and access to professional day traders who provide guidance. While some firms may charge fees for training to ensure commitment and eliminate traders who aren't serious, the opportunity to receive structured training can significantly enhance a trader's skills and performance
👎 Cons
• Stress: Prop trading is a high-pressure and stressful occupation. Traders are exposed to constant market fluctuations, time-sensitive decisions, and the risk of financial losses. The need to think quickly and make split-second decisions under stressful conditions can take a toll on traders' mental and emotional well-being
• Job security: Prop trading is known for its performance-based nature, and traders' job security is directly tied to their profitability. If a trader consistently underperforms or experiences prolonged periods of losses, they may face termination. The absence of a steady salary or guarantee of employment adds an element of uncertainty to the career
• Costs and profit sharing: Some prop trading firms charge traders various costs, such as seat rental fees, software access fees, and marked-up commissions. These expenses can eat into a trader's profits and reduce their overall earning potential. Additionally, certain firms may have profit-sharing arrangements, where a percentage of the trader's profits is retained by the firm. It's important for traders to carefully evaluate the costs involved and understand the specific profit-sharing structures before committing to a prop trading firm
How to choose the best Forex prop firm?
When choosing a prop firm, experts suggest keeping the following factors into consideration:
Reputation and track record: Research the reputation and track record of the Forex prop firms you are considering. Look for firms with a solid history in the industry, positive reviews from traders, and a track record of success. Consider their experience, stability, and overall reputation within the Forex trading community
Regulatory compliance: Ensure that the prop firm is regulated by a reputable financial authority. Regulatory oversight helps to protect traders' interests, ensures fair practices, and provides a level of accountability. Look for firms regulated by respected bodies such as the Financial Conduct Authority (FCA) in the UK, the National Futures Association (NFA) in the US, or the Australian Securities and Investments Commission (ASIC)
Trading platform and technology: Evaluate the trading platform and technology offered by the prop firm. A robust and user-friendly trading platform with advanced features and tools can greatly enhance your trading experience and efficiency. Consider factors such as order execution speed, charting capabilities, and access to real-time market data
Trading conditions: Assess the trading conditions provided by the prop firm, including spreads, commissions, leverage, and margin requirements. Compare these factors with other firms to ensure they are competitive and align with your trading style and preferences. Look for firms that offer tight spreads, low commissions, flexible leverage options, and reasonable margin requirements
Funding and withdrawal process: Understand the funding and withdrawal process of the prop firm. Check if they have convenient and secure methods for depositing and withdrawing funds. Consider factors such as withdrawal fees, processing times, and available payment options
Training and support: Look for a prop firm that provides comprehensive training and support to its traders. Evaluate the availability of educational resources, trading tools, and mentorship programs. A firm that invests in the development of its traders can significantly enhance your learning curve and trading skill
Risk management policies: Consider the risk management policies implemented by the prop firm. Look for firms that prioritize risk management, including measures to protect traders from excessive losses and provide risk assessment tools. A robust risk management framework can help safeguard your trading capital and promote responsible trading practices
Profit-Sharing and payout structure: Understand the profit-sharing and payout structure of the prop firm. Evaluate the percentage of profits retained by the firm and the payout frequency. Consider the overall fairness and transparency of the profit-sharing arrangement, ensuring it aligns with your financial goals and expectations
How much do Prop traders earn?
According to Zippia, prop traders' earnings can vary significantly depending on various factors. In the United States, the average salary for proprietary traders is around $100,000.
The salary range for the same region falls between $60,000 and $165,000. When considering hourly rates, prop traders in the US can expect to earn between $28 and $79 per hour. The highest-paying states for proprietary traders in the US are New York, New Hampshire, and Rhode Island, with average salaries ranging from approximately $124,000 to $126,000. It's worth noting that the D. E. Shaw group is known for offering some of the highest average salaries to proprietary traders. Keep in mind that these figures are approximate and can vary based on experience, performance, the specific prop trading firm, and market conditions.
How Much Do Funded Forex Traders Make?Best Forex prop firms in 2024
Experts have identified the following to be the Best Forex prop firms in 2024:
Topstep
Topstep is known for its outstanding reputation, trader support, and high payout ratios. They offer a two-step evaluation process called Trader Combine, where traders have unlimited time to hit profit targets. Traders keep 100% of their initial profits, and going forward, they receive 90% of their profits.
Fidelcrest
Fidelcrest is a reputable prop trading firm with a strong reputation and a global presence. They offer performance coaching, million-dollar account sizes, and up to a 90% profit split. With Fidelcrest, traders can access real capital after successfully passing their evaluation process.
How to Become a Prop Trader? A guide for beginnersFAQs
What are the pros and cons of prop trading?
Pros of prop trading include potential high earnings, independence, and valuable skill development. However, cons include high stress levels, job security risks, and potential costs charged by some firms.
Is prop trading a good career?
Prop trading can be a good career choice for individuals who thrive in a fast-paced, high-risk environment and possess the necessary skills and qualities. However, it may not be suitable for everyone due to the intense competition and inherent risks involved.
What are the disadvantages of prop trading?
Disadvantages of prop trading include the high levels of stress, uncertain job security, potential costs charged by some firms, and the need to continuously perform and adapt to market conditions.
What is the failure rate of prop traders?
The failure rate of prop traders can vary, but experts suggest that it is generally acknowledged to be around 75%.
Team that worked on the article
Chinmay Soni
Contributor
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
Developmental English Editor
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
Cryptocurrency and stock expert
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).