What Does a Prop Trader Do?

The rise of prop trading in the financial markets has opened up new opportunities for traders looking for trading funding to manage risks and increase their profit potential. Prop trading is fast changing how traders access markets, and with dozens of companies offering this product, financial trading will become more accessible.

Understanding Prop Trading

Proprietary trading, commonly called prop trading, refers to trading financial markets using the capital provided by firms like OANDA Prop Trader instead of the trader’s money. Prop firms help traders overcome one of the biggest challenges in trading: getting enough capital.

Prop traders leverage the firm’s funds to identify short-term or long-term trading opportunities. They use strategies that may include arbitrage, high-frequency trading, or market making. Success in proprietary trading relies heavily on market analysis, risk management, and quick decision-making skills.

Features of Prop Trading

Prop trading has five key features. These are:

• Diverse trading instruments: Prop firms typically offer diverse trading instruments, from Contracts for Difference (CFDs) on currency pairs to shares, cryptocurrency, and commodities. This allows traders to explore financial markets fully.
• Advanced trading technologies: Prop firms also offer some of the latest trading technologies or allow the integration of such third-party tools. This is important to help traders stay competitive in the trading industry. Advanced tools like indicators, technical tools, and trading robots are commonly offered in prop trading.
• Profit sharing: Profit sharing is another unique feature of prop trading that allows the firms to keep a portion of traders’ profits. This is used to offset related costs and keep the prop firm profitable. Profit shares are typically calculated in percentages, usually between 80% and 95%, for the trader, depending on the prop firm and the account size.
• Risk management rules: Prop providers stipulate specific rules to keep traders compliant with risk management. The rules typically include a daily and overall drawdown percentage, lot sizes, and minimum trading days. They may also include restrictions on news trading, high-frequency trading, and hiring traders to trade the accounts.
• Evaluation process: The evaluation process is a necessary feature that allows prop firms to ascertain the trading skills of their clients. Evaluations also help traders become familiar with the trading environment and conditions so they can adjust their strategies accordingly.

Differences Between Prop Trading and Traditional Trading

Prop trading differs from traditional trading in four major ways.

Source of capital

Traders must deposit money into their broker account to trade in traditional trading. This means traders take full responsibility for trade outcomes with their money. However, the firm provides the capital in prop trading and is responsible for trade outcomes. Prop capital comes from various sources, including pooled and hedge funds.

Trading rules

Both trading models offer traders flexibility and freedom to choose their strategies and risk appetite. Traditional trading has basic rules such as minimum and maximum lot sizes based on the trading capital and other conditions determined by the market. However, prop firms understandably require stricter rules that ensure traders stay within the risk management framework. This is mutually beneficial to both prop firms and traders.

Profit structure

Traditional traders keep 100% of their trading profits and are not required to split with their brokers. Prop traders, on the other hand, use a profit-sharing model that allows them to keep the majority of their profits. In contrast, the prop firm takes a smaller portion.

Responsibilities of a Prop Trader 

A prop trader has four primary responsibilities.

1. To manage the trades and stay within the risk management rules.
2. To comply with safety, security, and ethical measures.
3. To formulate strategies, analyze markets, execute trades, and monitor performance.
4. To collaborate with the prop firm on critical issues when necessary.

Although prop traders are not responsible for trade results, they must comply with the firm’s rules and local and regional regulations impacting the use of prop products and services.

Pros and Cons of Prop Trading

Pros

• Access to higher capital: Traders can potentially increase their profits with higher capital. This is excellent for traders who want to scale their objectives with the least risk. There’s no financial risk on the traders’ part.
• Higher leverage: Trading prop accounts allows traders access to higher leverage than retail traders. With prop accounts, traders enjoy similar leverage to institutional traders.
• Improved trading skills: Prop firms offer continuous trader education that enhances their skills and helps them become better traders. The strict rules also help traders become more disciplined with their executions.

Community collaboration: Prop firms project a sense of community and back it up with regular community meets, voting, and ask-me-anything sessions on social media.

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