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How to Become a Prop Trader – 7 Steps to Getting Funded

how to become a prop trader
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Proprietary trading or prop trading has become a fast-growing profession for people looking to make money from the financial markets. This article will discuss what a prop trader is and what are the steps to take to become a prop trader. The process is simple, and with many online platforms coming up, the opportunities are galore for interested individuals. What was once considered as a technical profession can now be pursued with a basic understanding of trading.

What is a Prop Trader?

Prop traders use the capital provided by a company to conduct trades involving assets classes like futures, stocks, currencies, and commodities. The more complex trades include derivatives of these assets. A prop trader can work for an online broker or a financial firm, for example. An important aspect to consider is that the trader uses the firm’s money and not the funds that depositors contribute. In specific arrangements, a prop trader provides a part of his capital to ensure that a trader acts in the best interest of the trading firm and is not involved in excessive risky trades.

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What does a Prop Trader do?

A prop trader conducts trades on behalf of a firm using the capital provided. A prop trader usually has the flexibility to work whenever he wants and can choose the asset class for trade. There is no minimum limit on the number of hours that a trader needs to work, and this makes it an appealing profession. Any profit the trader gains, they generally split between themself and the company. The exact ratio depends on how the capital was provided. Performance bonuses and profit-sharing can form a large part of the earnings of a prop trader. They place these trades using appropriate strategies through the online platform provided by the company.

Traders generally make use of technical indicators that these platforms provide. It is also necessary to ensure to use a stop loss so that they do not lose the entire capital on a single trade. Each trader has his unique way of trading, which the firm looks to take advantage of. 

How to become a Prop Trader

The road to becoming a prop trader has been simplified considerably above, and now that you know what they do, it is time for you to learn the steps to become one. Even a person who has limited financial knowledge can learn the tricks of the trade and get going on their journey with the 7 steps below. While practical experience is of the utmost essence, we will try to simplify the process for someone who is keen on becoming a prop trader. 

1. Learn to trade the market

It would be outlandish to think that anyone can just hop in and make a profit. If that is the case, then everyone would be a prop trader. It is essential to understand the different markets and what drives them. A prospective prop trader can choose between futures, equity, foreign exchange, or commodity depending on his inclinations.  You should spend a significant amount of time tracking these markets. It’s also crucial to understand the movements based on technical and macroeconomic factors. One should be able to know when to enter and when to exit. This is the first and most crucial step.

2. Follow the rules

Every market has its set of rules that traders need to adhere to. For example, a prop trader investing in the equity markets in the US should be aware of the timings. Futures and derivatives contracts would require initial and maintenance margins that need to be tracked and settled daily. There are circuit breakers that may vary from stock to stock. Prop traders should not make use of material non–public information, and any such trades would be deemed illegal. There are other legislations like the Volcker rule, which may be applicable to prop traders who work in financial institutions accepting deposits. Each broker also has its own set of rules like maximum position size or daily loss limit that should not be breached.

3. Setup a trading strategy

There are numerous indicators that a prop trader can use. Across all of them, the trader has multiple strategies to choose from. Suppose an inexperienced trader relied on the Simple Moving Average (SMA) for executing his trades. Within this technical indicator, the prop trader can choose 50-period SMA or 100-period SMA depending on his needs. It should be noted that no single strategy can assure profitability, and it is a good practice to supplement a technical indicator with other measures as well. An SMA may indicate that the stock is overbought, but if the quarterly earnings are robust, we could expect further price appreciation in the shares of a company.

4. Practice money and risk management

Like we stated before, there is no technical indicator that can guarantee 100% profitable trades. Historical trends may not have a good predictor for future prices. Every trader will recommend using adequate risk management to limit losses. This is particularly relevant for a prop trader because the positions they take generally use leverage. This means that they can take a position of $100,000 by just putting in $10,000 of capital. When markets are not favorable, chances are high that the losses could exceed $10,000. Stop losses, and hedging are useful measures to manage the amount of risk taken.

5. Practice with Paper Trading

Before actually trading on the capital of a firm, prop traders often receive a simulator account on trading platform to demonstrate their abilities. This is a learning step for the prop trader and it also acts as a way of assessing his abilities. Most firms recruit a trader only when he has performed well in paper trades. It allows the company to gauge his trading strategies along with the risk management practices that are put in place. It is also a good way for traders to browse through the features that the online platform has to offer. Many brokers provide this facility at a minimal cost.

6. Subscribe at a Prop Trading Program

After obtaining the necessary skills to become a prop trader, an individual can register on an online evaluation to take the process ahead. Gauntlet Mini by Earn2Trade is one such program. It examines the capabilities of a trader in the intraday futures market. There are numerous advantages that this test offers before a trader joins the actual prop trading firm. At a reasonable monthly price, the candidate can qualify for a prop trader position in just fifteen days. The interface is easy to use and reliable, giving traders the feel of an actual scenario.

There are other fees that this program saves you. These include Finamark License, Educational Content, Data Fees, and Journalytix License. The repository of educational material is also beneficial for these prospective traders as this section offers over 60 webinars with more than 50 hours of content. Gauntlet Mini also gives users the flexibility to choose the type of account based on the amount of virtual capital. Monthly subscription ranges from $150 for $25,000 virtual capital to $350 for $150,000 virtual capital. The program resets in case a candidate fails to meet the requirements i.e., the person can enroll again later after paying the necessary fees.

7. Get Funded to Trade

Once a candidate completes the Gauntlet Mini test successfully, they will receive an offer from Helios Trading Partners. The trader can actually trade using actual capital provided by Helios Trading Partners. The firm offers an opportunity for profit sharing with 80% of the profits going to the trader. The trader should ensure his presence in the trading platform on a regular basis to prevent termination of his account. The account type is the same as in the Gauntlet Mini platform and therefore, there is no need to learn a new interface.

Things to Know Before Becoming a Prop Trader

There are other factors that one should know before taking a step forward in this direction. While understanding the markets is important, these nuances should not be missed. We will explain some of these below so that you can make a well-informed decision.

Costs and Taxes

Prop traders have to bear a number of costs and taxes. Many brokers charge a platform fee or a monthly subscription for accessing the account. There could be additional fees levied for accessing data or other educational material. Taxes pertaining to the transaction of financial instruments are also borne by the prop trader. These can add up to a significant amount for a trader not generating sufficient profit.

How does a prop trader make money?

Most prop traders make money by taking a share of the profit they make by executing trades. The returns are multiplied due to the additional capital poured in by a trading firm. Many firms offer a fixed salary and a bonus component based on performance. Performance is critical for a prop trader to make money.

How much money do you need to become a prop trader?

It could be zero, and in that case, the firm will keep all of the trader’s profit. In return, they give the prop trader a fixed salary as compensation. Most trading firms have a monthly fee in the range of a few hundreds of dollars for using the platform. If the firm has to provide capital to the prop trader, then the share they require the trader to front could be significantly higher.

What’s the average salary of a prop trader?

According to a survey conducted by Payscale, the median salary of a prop trader is approximately $81k. 80% of the salaries were within the range of $50k and $151k. About 50% of the salary was in the form of bonuses, commission, and profit-sharing. Prop traders can choose between a firm that offers a fixed salary or a one that has a profit-sharing agreement.

What is the routine of a prop trader?

Most prop traders operate in a specific market so his trading happens during this time. However, a prop trader should be aware of economic developments taking place across the globe. They spend a lot of their time reading such news and tracking the development in other markets as well. During trading hours, the trader has to constantly monitor the price and look for opportunities to enter or exit the market. Such opportunities can emerge within a few minutes and on certain days the trader may not execute any trade.

Is it worth it to become a prop trader?

Being a prop trader has its pros and cons. It gives the trader access to capital in order to enhance profitability. This also reduces the risk that the trader takes since the money he puts in is limited to the fees and taxes.  Prop traders enjoy a degree of freedom that does not come in with a normal job.

Advantages

By participating in a profit-sharing mechanism, there is no cap on the earnings of a prop trader. Unlike a typical job, there is no defined working time limit set. Prop traders have the option to enter and exit whenever they feel like. The assessment of a trader is objective and is based on his ability to deliver on profits. There is no hierarchy involved in the appraisal process.

Disadvantages

It is a highly competitive job that requires an individual to perform. Firms expect decent returns on the capital they have invested, and to deliver on such expectations can be challenging. Many trading firms don’t offer a fixed salary. With those companies, traders can have occasions when they don’t earn anything. The timing of the market can also be a challenging task.

Final Thoughts

The journey to being a prop trader has been simplified over the years. With advanced online platforms, prop traders can monitor trades and develop strategies that can significantly boost profits. Profit-sharing models have also encouraged more people to enter this domain. If you have the zeal to perform and have the necessary knowledge, we recommend you enroll with one of the brokers and embark on this journey where the sky is the limit. 

Ready to Kickstart Your Trading Career?

Subscribe now to our Gauntlet Mini™ and begin your path to becoming a Prop Trader

  • The Gauntlet Mini™
  • Trading Simulator (Data Feed Included *)
  • 60 day Journalytix License
  • Complimentary Access to the Beginner Crash Course over your Subscription Period
  • Guaranteed Funding Offer After Successful Completion
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