What is Prop Trading?

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What is prop trading? An in-depth look at how prop firms hire traders, capital allocation, income potential in this career, challenges like volatility and more.

So you’ve heard about proprietary trading but still don’t quite understand what it means. Fair enough, it can be confusing. Do questions like “What is prop trading?,” “How do prop firms work?,” or “Can prop traders make real money?” keep bouncing around your mind?

I get it, pulling back the curtain on how prop traders seem to earn fortunes yet shoulder limited risk can feel perplexing from the outside looking in.

This article aims to answer those key questions swirling around prop trading and provide clarity on aspects like:

  • The capital allocation, profit splits and business models that make prop firms function
  • The taxpayer lifestyles prop traders appear to lead from the surfaces
  • The immense pressures and unique challenges top earners in the space endure

While prop trading’s incredible income results certainly seem alluring and are very real, a deep dive shows its not all flashy Porsches and honeymoons in Bora Bora as Instagram may depict.

But for traders possessing the requisite abilities and temperament to thrive in such a performance-based career, long-term financial freedom most only dream of could become reality…

Hopefully, the following will shed light on whether the prop trading path might be a good fit for your personal goals and financial future.

What is Prop Trading?

Prop trading firms hire traders and give them access to a trading account loaded up with the company’s money. The traders then speculate on markets – anything from stocks and crypto to futures and forex – in the hopes of making profits.

Here’s the best part: traders get to keep a juicy cut of any profits generated, often 80% or more! But they don’t lose any money if the trades don’t work out. The only risk is potential lost income. So traders get to enjoy huge upside rewards with no personal financial risk. I can certainly see why so many find that proposition tempting!

Advancements in trading technology have also fueled prop trading’s rise. Traders can now speculate on markets across the globe directly from their laptop. This remote flexibility was unheard of a decade ago. Prop firms advertise these technological capabilities to attract top talent.

With the chance to leverage piles of capital while pocketing most of the profit, prop trading seduces many traders. But for all its advantages, prop trading also brings unique demands. Generating consistent profits by trading someone else’s money can be challenging. Prop trading definitely isn’t for the faint hearted!

Read also! Prop Trading vs Hedge Fund

How Do Prop Trading Firms Work?

So how do these prop trading firms actually work? Well, at their foundation, prop firms hire traders to speculate in markets using the company’s money, not the trader’s money.

The firms provide everything a trader needs to start trading – access to capital, trading infrastructure, even training if needed. Some prop firms allocate over $1 million in buying power to profitable traders, all provided by the firm.

In exchange for the firm’s capital and facilities, the trader tries to generate consistent trading profits. This isn’t easy of course. There are no guarantees in trading. But rewards await those traders able to trade profitably.

And what rewards they can be! Successful prop traders usually keep 70%, 80%, or more of the profits they make for the firm. Some firms even offer 90% payouts to their top performers.

Now that’s what gets traders excited. Pocketing such huge portions of your trading gains beats trading your own small account any day. Just imagine keeping $700,000 of a $1,000,000 annual trading profit!

But there’s no riches without risks, right? Well in prop trading, risks faced by traders are quite limited. Prop firms assume the financial risk. If the trader loses money, they simply don’t get paid. The only risk they carry is lost potential income.

This means traders can shoot for incredible profits, while the firm’s capital protects them from losses exceeding their own funds. I can see why prop trading opportunities appeal to speculative traders.

What Are The Benefits of Prop Trading?

What Are The Benefits of Prop Trading

Prop trading clearly offers some juicy perks to traders. Let’s explore why so many are chomping at the bit to land a prop job.

  • Income Potential – Prop firms provide the ultimate chance to quickly build significant wealth. Traders get to compound profits trading substantial firm capital rather than meager personal accounts. The income potential truly is staggering for skilled traders.
  • Lifestyle Flexibility – Unlike slaving away at a rigid bank or hedge fund, prop traders enjoy unmatched flexibility and freedom. There are no mandatory office hours. Traders can operate however and wherever they want – whether that’s from a tropical paradise or their basement in sweatpants.
  • Firm Capital & Infrastructure – Prop firms provide traders access to massive buying power and first-class trading infrastructure that would be enormously expensive for an individual to acquire. We’re talking million-dollar platforms and tools.
  • Ongoing Development – Prop firms provide extensive training, mentoring and profit analytics to help traders reach their income goals. Having a team of experienced professionals guiding you certainly beats trying to trade alone.
  • Rewarding Profit Splits – Successful prop traders usually keep at least 70-80% of the profits they generate for the firm. Some firms even offer 90% payouts to top performers! Much better than trading personal accounts.

Between the mouthwatering profits, unparalleled flexibility, and first-class support, I think the benefits of prop trading are clear. You are now probably wondering how can you join a prop trading firm. Let’s now see how you can make it through that audition process…

What Skills and Qualities Do Prop Firms Look For?

Prop firms offer nice perks, but they certainly don’t let just anyone play with their millions. Traders have to prove they have the skills and qualities to trade profitably. Let’s look at what prop firms seek:

  • Proven Profitability – Prop firms want to see a strong track record of consistent profits. They analyze traders’ past account statements to verify their ability to generate gains trading live markets with real capital over time. Firms aren’t investing millions in someone with unreliable returns!
  • Risk Management – Generating profits is only part of the equation. Prop firms scrutinize a trader’s risk metrics to ensure they don’t take excessive losses chasing rewards. Keeping losses small and protecting capital is crucial when trading sizeable positions. Prop firms test risk management in their evaluation process.
  • Market Expertise – Prop trading roles center around specific markets like futures, forex, or crypto. Firms want to see extensive specialization and a honed edge in a trader’s chosen asset class. Having an informational and analytical advantage in their sector demonstrates a trader’s capabilities and commitment to mastering the nuances required for success.
  • Values Alignment – Prop firms seek out traders that embody similar principles and values central to their company culture. Ethics, professionalism, determination – these attributes enable prop traders to handle the responsibility of representing the firm through both wins and losses. Shared values foster better partnerships rooted in trust and transparency.

The selective nature of securing a prop trading position can be intimidating. However, viewing it as a careful investment by the firm can help traders better align their experience and talents with what prop firms prioritize in their search for talent.

Challenges and Drawbacks

Challenges and Drawbacks of prop trading

Prop trading isn’t all fun and games – the job comes with some real challenges too. I know the flashy cars and big profits may distract people. But going in blindsided helps no one. Let’s talk about three common drawbacks traders face:

Performance Pressures

Making big money sounds nice until you realize the flipside – prop firms impose strict profit targets like “make 10% returns every month or get cut.” Hitting numbers like that consistently with other people’s money piles on immense pressure. Missing your $100k target by a few grand likely means you’re gone.

Nigerian prop trader Chidi Nweke knows the pain firsthand:

“As a father of three, I used to lose sleep at nights worried my small drawdowns would get me kicked to the curb without consistent income for my family,” Chidi admits. The pressure to perform in a prop role as the sole breadwinner gave me major stress.”

Job Insecurity

While prop firms supply the capital, they retain the right to reclaim it if traders struggle. Capital preservation is priority number one. No guaranteed salaries here like in traditional finance roles. Just ask Amy Ng – after grinding as a prop trader in London for 8 years, struggling crypto markets last year sank her returns.

“I got cut even though I was a loyal and consistent moneymaker for that firm most years. But without basic protections like severance or health insurance that most UK jobs offer, I felt so disposable,” she laments.

Lack of Independence

Although prop traders don’t risk personal capital, firms implement strict risk guidelines like capping per trade losses at $X. Despite location flexibility prop trading permits, following someone else’s trading rules can still feel constraining. Canadian prop trader Jean DuBois remembers disputing his firm’s controls:

“I was forced to exit several winning oil trades early last spring because of blanket firm limits. Had I been independent, I could’ve held on to score way bigger gains. The lack of trading autonomy bit hard.” he recalls.

We are not highlighting these drawbacks and stories to discourage traders but rather provide realistic expectations. Entering any career – let alone one with such extremes as prop trading – armed with eyes wide open is always wise. Would love to hear your experiences and add additional challenges if we missed any!

Is Prop Trading Right For You?

With both the enticing perks and harsh realities of prop trading covered, the natural question becomes – is this career path right for me? There’s no universal answer, as suitability depends greatly on one’s skills and mindset.

Pursuing prop trading is a major decision that requires brutal self-honesty. Ask yourself – can you handle extreme income volatility month-to-month? Prop traders face huge P&L swings based on trading performance. Six-figure winning months can nosedive into five-figure losses the next. If income instability gives you anxiety, steer clear.

Similarly, assess your ability to trade through losses and drawdowns without emotional decision-making. Prop firms have strict max loss limits per day/week/month. Can you stomach reaching firm loss caps, having the plug pulled on trading, and still come back focused the next day? If losses knock you off your game for days or weeks, prop trading likely won’t work out.

Lastly, gauge your motivational needs. Prop trading provides zero oversight – no managers cracking the whip to inspire you. You must diligently grind each day despite no one watching. If you know you perform best under strict accountability structures, consider if you can adapt to prop trading’s isolation.

Making an honest appraisal of these areas – income volatility tolerance, emotional resilience after losses, motivational needs – should indicate whether you realistically can thrive in a prop trading role or not. There’s no shame if the model doesn’t suit your personality and needs. The key is self-awareness first before pursuing the path blindly.

Take Away

To conclude, I think we’ve covered both the clear enticements prop trading offers while also squarely addressing the challenges inherent to the career. When executed skillfully, prop trading provides unmatched profit potential and lifestyle freedom that bests most finance roles. Yet thriving long-term requires immense mental stamina given income fluctuations and job insecurity traders face.

For aspiring prop traders, truly consider whether your personality and motivational needs align with what is required to succeed.

  • Are you comfortable operating autonomously for prolonged periods?
  • Can you navigate market volatility without income stability concerns?
  • Are you willing to prove yourself continually to maintain access to firm capital?

Grappling with these questions now prevents turmoil down the road.

If upon honest self-reflection prop trading still intrigues you, develop your trading skillset relentlessly before attempting to get funded. Commit fully to your trading education, specialize in a specific market, absorb the accumulated wisdom of veteran traders through communities, mentors and books. Lay this diligent base work to stand out once you do apply to firms.

Prop trading is surely not suited to everyone. But for ambitious, resilient traders able to put in the self-driven preparation it commands, the model offers aspirational income levels and freedom from conventional career paths. I wish everyone evaluating this route great discernment, skill development and success should you choose to pursue it!


  1. Are proprietary trading firms legit?

Like any industry, some legitimate and some illegitimate firms exist. Reputable regulated prop firms legally split profits generated from traders speculating markets.

  1. What markets do prop trading firms operate in?

Prop firms trade a wide range of markets like equities, futures, forex and cryptocurrencies. Most firms focus specifically on one asset class.

  1. How much money can trader make in prop trading?

While results vary drastically, top prop traders can earn several hundred thousand dollars to over $1 million in net profit sharing per year. However, most will make less.

  1. What skills do you need to be a prop trader?

You need consistently profitable trading skills & risk management abilities. Strong self-motivation and mental composure are also vital soft skills prop firms look for.

  1. Do you need experience to be a proprietary trader?

Solid experience is often required. Many firms want 2+ years of active trading and an audited track record of profits. Programs exist to train new traders without experience though.

  1. Can proprietary traders work remotely?

Yes, prop trading’s technological infrastructure allows most tasks like researching, training, and managing trades to occur remotely via internet from anywhere. No physical office is necessary.