The ultimate guide to prop trading: everything you need to know

Prop trading, as it is commonly known, is the activity of trading financial assets using a company’s own funds rather than those of its clients. Prop trading companies participate in a variety of financial markets, such as stocks, bonds, currencies, and derivatives, using their own money. Successful prop traders have the potential to produce substantial gains for their companies, and they are often paid a percentage of the profits they make. If traders are knowledgeable about what they are doing, success in prop firms is not difficult to achieve. For example, creating a trading plan is an excellent move, but it is completely useless if traders don’t know if their trading strategy will result in profits or not. Not all trading plans or methods are made equal, and many won’t have an advantage in the markets, meaning traders will breakeven after making hundreds of transactions. It is impossible to avoid the fact that back testing a system takes time. To effectively back test, traders must use their trading plan to simulate hundreds of “legitimate” deals and calculate profitability. Back testing will also enable them to make adjustments to their trading strategy that should improve profitability and, ideally, lower market risk. Back testing can be done using a variety of tools, including TradingView. 

How to become a prop trader:

• Build a trading foundation: Prop trading demands a thorough grasp of trading tactics, economics, and financial markets. 
• Acquire experience: Getting hands-on experience is the greatest approach to learn how to trade
• trading plan: Effective prop traders have a clear trading strategy that takes into account risk management, position sizing, and entry and exit criteria. Also, they should use previous data to backtest their technique to make sure it works.
• Find the right prop company: These companies employ traders to trade with their capital. Traders should investigate and contrast several companies based on their capital allocation, trading methods, and remuneration plans. 
• Pass a trading evaluation: Traders should hone their risk management techniques and trading plan in order to be prepared for the examination.
• Trade the prop account: Traders can begin trading using the firm’s money. To reduce losses and increase earnings, they should adhere to risk management guidelines and trading strategy
• learn: Prop trading is a dynamic and ever-changing industry. Traders should never stop learning and developing their trading abilities if they want to remain successful and competitive

Prop Trading – what are the benefits?

Let’s analyze the benefits of prop firms:

• Increased profitability: When traders begin trading with a prop firm, whether financed or in the challenge stages, they frequently realize that their profitability really increases.First of all, traders are more responsible when handling other people’s money. Due to the fact that they now have someone to answer to, traders frequently treat this with more seriousness than trading their own money. (in theory). Profitability often rises as a result of this. Not only that, but it also results in improved trading plan adherence. 
• Reduced Risks: Even though there will be more money at risk when a trader is  funded, it won’t be trader’s money.  Let’s take OFP into consideration, overview funding program offers accounts up to 100.000 dollars. Assume for a moment that a trader has had that account for months and is not a good trader. Due to market conditions, traders hit a rough patch of drawdown and eventually exceed the account’s maximum drawdown. The losses will be completely reduced compared to a personal 100k account. And if the trader is very skilled individual, imagine how many profits he will be able to make thanks to capitalization.

Tips to pass a prop firm and receive a payout:

Avoid trading high impact news: High-impact news events like the NFP can have a significant impact on how prices move in the currency market. The problem with high-impact news events is that they can result in pretty significant market slippage. Stop-loss prices aren’t guaranteed to be filled as a result of this slippage. Due to the lack of liquidity during these swift price changes brought on by news events, traders have been known to lose three times their real stop loss amount.

Scaling positions: Scaling into positions is a very complex trading strategy, yet it frequently produces excellent profits for traders. Typically, to do this, traders place a tiny amount of risk in their trading position before adjusting their stop loss to breakeven. When they reach breakeven, they move into a new position and increase the level of risk. Theoretically, this enables traders to profit more from profitable trades without ever having to take on additional risk.

Remove emotions: A funded trading account’s restrictions and rules can cause emotions to spike. It’s crucial to maintain perfect objectivity in the markets, even though it might be quite difficult to do. Traders should be strictly adhering to a rule-based trading strategy.