How to Become a Prop Trader

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 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. It was once considered a technical profession but can now be pursued with a basic understanding of trading.

Last updated on March 14, 2024

Table of Contents Hide

1. What is a Prop Trader?

2. How to become a Prop Trader

3. Things to Know Before Becoming a Prop Trader

4. Is it worth it to become a prop trader?

5. Final Thoughts

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. They place these trades using appropriate strategies through the online platform provided by the company. A prop trader usually can 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, making 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.

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

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 simplify the process for someone keen on becoming a prop trader.

I WANT TO BECOME 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. Depending on his inclinations, a prospective prop trader can choose between futures, equity, foreign exchange, or commodity. 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 use material non–public information, and any such trades would be deemed illegal. Other legislations like the Volcker rule may be applicable to prop traders who work in financial institutions accepting deposits. Each broker also has its own 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. The prop trader can choose 50-period SMA or 100-period SMA within this technical indicator 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. 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 a firm’s capital, prop traders often receive a simulator account on a 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 the person’s trading strategies and risk management practices. It is also a good way for traders to browse through the online platform’s features. Many brokers provide this facility at a minimal cost.

After obtaining the necessary skills to become a prop trader, an individual can register for an online evaluation to take the process ahead. The Trader Career Path® 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. The candidate can qualify for a prop trader position at a reasonable monthly price 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 Ninjatrader or 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. The Trader Career Path® also gives users the flexibility to choose the type of account based on the amount of virtual capital:

TCP25 – virtual starting capital of $25,000
TCP50 – virtual starting capital of $50,000

Both accounts come with a free reset upon every rebill, so if a candidate breaks the evaluation rules, they can reset their account using one of their free resets, which can be accumulated for future use.

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7. Get Funded and Start Trading

Upon successful completion of the Trader Career Path® test, traders receive a funding offer from Helios Trading Partners and are entitled to keep 80% of the profits generated on the provided account. The initial capital is equal to the evaluation account size and is scalable up to $200,000 in the TCP25 and $400,000 in the TCP50. Here you can learn more about the program and what happens after you get funded.

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 many 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 on 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 hundred 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 profit-sharing agreement.

What is the routine of a prop trader?

Most prop traders operate in a specific market, so their 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. During trading hours, the trader must 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 to enhance profitability. This also reduces the trader’s risk 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 it. 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.