In the Forex trading world, you may see the term prop trader or proprietary trader getting thrown around a lot. Becoming a prop trader can be highly lucrative and coveted, so what is a Forex prop trader, anyway?
A Forex prop trader is a trader that trades using other people’s capital. You can source this capital privately, by working at a trading desk, or by trading for an online proprietary trading firm. There’s usually a profit sharing agreement where the financial firm will keep a certain percentage and the rest will go to the trader.
Most people who are looking to become forex prop traders will be looking for online prop trading firms like FTMO, so that’s what this article will focus on.
What is a prop firm?
A prop firm is a company that trades its own capital instead of trading its clients’ capital. This way, they can keep all of the profit on any trades they execute.
How to become a prop trader
Becoming a prop trader can help put you on the fast track to join successful traders who have achieved financial freedom.
You must already be a profitable trader in order to succeed with a trading firm, so here’s a quick overview of what you need to do to get started.
The first and most important thing to understand is that in order to become a prop trader and make proprietary trading your main job(or a significant supplement to your income, at least), you’ll need to be dedicated.
The financial markets are tough and love to eat up retail traders for breakfast, lunch, and dinner. You need to dedicate yourself to watching the charts and be willing to invest a good chunk of time to join the elite group of experienced traders.
Practice, practice, practice
If you’re a new prop trader, you need to practice, practice, and practice even more using a paper trading account before trying to trade with your own money or the firm’s capital.
A trading career is built upon years of practice and making mistakes to learn how the market really moves. This will help you dial in your trading strategies and become consitently profitable.
You need to be able to make a profit over at least 6 months in paper trading before you can think about trading a prop firm account.
Treat it as a real job or business
In the real world, prop firms require a proven track record before they even consider you. That’s because you get access to real money that belongs to real people from the first day.
Online prop trading firms are a little different. If a prop trading firm has a challenge model, a good chunk of their revenue comes from failed challenges.
When you sign up for a challenge, you must already have a proven strategy and trading profits, even if they’re on paper.
The challenges are designed to feel a little like gambling, so you need to set those instincts aside and treat it as a real job or business.
Just how you would not take rash decisions or gamble with your business capital or your job, you should not have a gambling mentality when you attempt a prop firm challenge.
This means only executing trades when they fit your criteria and not taking impulse entries.
Find a prop firm that matches your criteria
Prop trading firms have varying trading rules and criteria. As a prop trader, you must find a firm that works for you.
Many firms offer a 30 day challenge, for example. If your trading strategy is a longer-term one, you may find it impossible to pass the challenge in the given time period without taking abnormally high risks.
The 30 day limit can put a lot of pressure on you, which is why it is also worth considering a firm that has direct funding options or a longer evaluation period.
My Forex Funds and City Traders Imperium both allow you to start trading live capital right away if you pay a higher fee.
The 5%ers offers a 180 day evaluation, and City Traders Imperium has a second option that gives you an entire year to pass the evaluation.
Prop trading firms will also differ in their rules: what instruments you’re allowed to trade, whether you’re allowed to trade during news events, and whether you’re allowed to hold certain trades over the weekend or even overnight.
You also need to consider what the profit sharing terms are. This is quite tricky: at first, you may be tempted to choose a firm that has the highest profit share percentage, but those firms often have fewer scaling options.
Other firms have lower profit sharing terms, but offer more scope for account growth, meaning you may be able to draw much higher profits in the long run with one firm rather than another.
Again, it depends on what your goals and needs are.
Also, there’s nothing stopping you from trading with more than one prop trading firm, so you can focus on account growth with one firm and short-term profits with another. This is a very viable option for experienced traders.
It’s also important to see which trading platform your proprietary trading company of choice is using. Most online firms offer their prop traders access to MT4 and MT5, and some even plug directly into TradingView.
Sign up and start trading
Once you’ve found the prop trading company of your choice, go ahead and sign up with them to start trading. Make sure you use sound risk management and remember: treat it as if it was your job and you were trading your own account instead of a firm’s capital.
Why become a prop trader
There are many advantages to prop trading:
Access to trading capital and no direct risk
The biggest advantage and lure of prop trading is that you as a prop trader can trade much larger capital than you could have as an independent trader.
Some prop firms offer capital as high as $1,000,000, which would be difficult for an individual to put forth.
As long as you stay within the bounds of the firm’s drawdown criteria, you can continue to trade. For example, if you have a maximum drawdown of 5%, that’s $50,000 on a $1,000,000 account.
If you were trading your own money, you’d start sweating bullets if you lost $40,000. As a prop trader, the firm bears that risk for you.
However, the real risk that you do take is the fee you pay to access the firm’s capital. So if you paid $300 for a challenge and then failed the challenge, you’re down $300.
Options for growth
Many proprietary trading firms have really lucrative scaling options. For every 10-15% that you can grow an account, some prop firms will go ahead and double your account size.
Some proprietary trading firms have a roadmap that lets you reach $1,000,000+ in funding in 6 to 7 steps.
With the right strategy and risk management, you can find yourself trading a really large amount of capital in comparatively little time.
Other firms have more modest scaling: they’ll increase your account balance by 25% for every 4 months that you are profitable.
Finally, the biggest advantage of working with a prop firm as opposed to a traditional hedge fund or trading desk is that you can trade from wherever in the world. All you need to make sure is that your hours overlap comfortably with the main hours of any of the three trading sessions, and you’re good to go.
You don’t even need multiple screens and a big desk: a simple laptop is enough, although a bigger screen does let you see more detail.
Becoming a consistent proprietary trader is a fast-track ticket to financial independence and is one of the best trading jobs out there.
Why you shouldn’t become a prop trader
Longevity of prop trading firms
Thanks to the recent boom in popularity that online proprietary trading firms and challenges have experienced, there seems to be a new prop trading website popping up every other day.
The bigger names like FTMO, My Forex Funds, and the like have been around for a long time and probably have very sound money management rules.
That said, Funding Talent recently had to shut down. They were one of the most popular funded account providers, and even after years of being in business, they abruptly decided to close up shop.
Established prop trading firms are probably going to be around for a while, but the biggest disadvantage of being a prop trader is your dependence on someone else.
Dependance on a 3rd party
While you do get access to a significant chunk of capital, a prop trading company is after all a 3rd party and you’re completely dependant on them for both your capital and your withdrawals.
The worst-case scenario would be that you become a prop trader, reach the status of professional trader based on your track record, only for the company to suddenly close up, or refuse to pay you your withdrawal based on some arbitrary rules.
Also, there’s no guarantee that once you’ve gotten access to a funded account, you can never lose it. You’ll always have to abide by the drawdown rules, so you have to be very consistently profitable in order to stay within the risk tolerance parameters and keep your account.
One way to get around this is to have funded accounts with different proprietary trading firms. Many successful prop traders attempt multiple challenges in order to spread their risk and increase their profit potential.
Conclusion: Is prop trading worth it?
The financial markets are very risky, but seasoned traders who have solid trading strategies and good risk management skills can make a lot of profit by becoming a proprietary trader.
It’s also good for newer traders that are profitable and want to make a career out of trading but don’t have enough capital to make a living from trading.
While there are certainly some risks involved such as challenge fees and account closures, the benefits definitely outweigh the risks.
Ideally, you should get started as a prop trader and as you build up enough capital, start building up your personal account, too. This way, you can eventually become completely independent.