Risk Management 101: Protecting Your Capitalkk

In many professions, you get paid for your time. Getting an hourly job can be a great way to turn your life around if you’ve ever been unemployed. 

In day trading, you get paid for smart trades, but there’s a caveat: you must have the capital to complete a transaction. You have to buy an asset if you want to sell it later. 

Some view this as proof that “you have to have money to make money,” especially if they want to argue that day trading isn’t a viable career. 

And that’s where a prop (“proprietary”) trading firm can make all the difference. A prop trading firm will equip you with the skills, technology, and buying power to beat the markets and pay your bills. 

Retail traders could use their own money to make trades. Many platforms will even allow you to buy a fraction of a share, meaning you can start with just USD 1. But making a living as a trader by starting with one dollar is like trying to start a farm with a single seed of corn or wheat. It’s theoretically possible; it will just take a very, very long time.

On the other hand, if you don’t know anything about farming, all the seeds in the world won’t make you rich. 

A day trader needs skills and buying power if he or she wants to make a living.

In this article, we’ll explain how prop trading works and how you can use it to become the professional trader of your dreams. 

What Is Prop Trading?

The “proprietary” part of the name comes from the trading hardware and software the company offers to its traders. Many trading platforms are available to the public, which has fueled massive growth in a category known as “retail trading,” which we’ll cover in the next section.

Prop trading firms develop unique hardware and software solutions to give their traders a competitive edge. This is especially important in areas such as data analysis and direct market access. Although the fundamentals of the trading tools on offer will be similar, not all prop firms are created equal. 

Another defining characteristic of a prop firm is the capital or “buying power” it provides to each trader. In some cases, this can be as much as USD 50,000-400,000, depending on a trader’s performance and qualifications. 

This fund represents the money that a trader can use to execute trades. It is not a bank account they can draw from or borrow against. It’s not the same thing as leveraged trading, although prop firms may also facilitate leveraged trades for qualified traders. 

In exchange for using the firm’s money to make trades, traders agree to share the profits. Usually, the profit split is between 50-80%, with some firms going as high as 90% for certain assets. 

The best prop firms shoulder 100% of the losses and use safeguards to prevent individual traders from losing everything. They do this to allow traders to focus on making smart trades with acceptable risk levels. If you’re stressing about every dollar that you lose, you won’t take enough risk to make a significant profit.  

Prop trading firms vet and train new traders to ensure the highest chance of success. They offer comprehensive training certifications and communities where new traders can find camaraderie and mentorship. 

People who partner with prop trading firms are often called prop traders or funded day traders. 

Thanks to the support of the prop firm, prop traders are better positioned than retail traders to use advanced trading strategies such as:

• Arbitrage
• Scalping
• Trend Trading
• Momentum Trading
• Reading the Tape

This is a small sample of the many trading strategies used by prop traders. There isn’t a “perfect” day trading strategy. The best traders explore many strategies, discover the ones they prefer, and master them.  

The Advantages of Working With a Prop Trading Firm

Institutional investors are the “old guard” of the trading world. They work at investment banks or firms, executing trades on behalf of a group or institution. They have the agency to execute trades as they see fit, but they are highly accountable for the returns they generate. 

On the other hand, prop traders have far more freedom, independence, and earning potential than institutional traders. Here are some of the major benefits of partnering with a prop firm:

1. Low Upfront Capital Requirement

Because prop firms are looking to recruit and train highly talented or skilled traders, they don’t require a large upfront deposit from would-be traders. Often, they require traders to complete a training program or prove their abilities in a trading simulator.

Once you’ve proven that you can execute profitable trades, the firm will provide you with a funded trading account to begin live trading.  

2. Access to Greater Buying Power

Very few people can access tens of thousands of dollars to begin their trading career. At Real Trading, we start most traders with a USD 50,000 trading account and may provide as much as USD 400,000 for Forex (foreign exchange) trading. 

Prop firms can also provide leverage trades via their broker. When traders use leverage, they borrow money from the broker to execute the trade. This allows traders to magnify their buying power but creates the risk of losing more money. 

3. Direct Market Access (DMA)

Some trading platforms and retail brokers build their systems with a deliberate price action delay. This means that the price you see may not match the actual price. The broker or platform provider can use that delay to their advantage and your loss. Regular brokers like Robinhood, Fidelity, and Schwab do not provide DMA.

The best prop firms offer DMA and allow you to select your own market maker–a firm that provides liquidity to the market–giving even more control over your trades.

4. Team Environment

If you’re not commuting to an office daily, day trading can feel like a lonely profession. This can lead to burnout and poor trading performance. It’s better to trade with a team. 

As part of a prop firm, you have access to a community of like-minded traders who are working with the same tools, tech, and markets. Many traders are extremely competitive, but prop traders aren’t in a zero-sum game for bonuses or promotions, so there tends to be a freer exchange of tips and ideas. 

5. Education and Mentorship

Except for the shady ones, prop firms only make money when their traders succeed. They invest heavily in education and supporting skill acquisition for their traders.

Prop firms will ask their top-performing traders to hold training seminars and mentor new traders. This means that prop traders learn from some of the most experienced traders in the world.

6. Prospects for Full-Time Trading

Prop trading is a meritocracy. If you learn the foundational skills and practice a disciplined trading strategy, you can turn day trading into a full-time career. There’s no office politics or bureaucracy to navigate. Make smart trades. Take home the profits. Wash, rinse, repeat. 

How To Get Into a Prop Trading Firm 

There are many prop trading firms to choose from. Some of the popular ones include the 5%ers, FTMO, The Funded Trader, FXIFY, Trade the Pool, and Real Trading.

To become a day trader with a prop firm, you should follow these steps:

1. Research Firms

The first step you should take is to make a list of top firms that you’re considering and create a list of pros and cons for each one. Read their terms and conditions and their user reviews. 

Some firms are designed around a “pay-to-play” model where you can unlock buying power by depositing additional money with the firm. Of course, your deposit helps the firm protect against losses, but that just means you’re shouldering those losses in advance. This approach favors people who already have expendable income to use for trading. 

Other firms, such as FTMO, prefer a lengthy evaluation period to weed out everyone but a select few traders. Still, other firms present as “prop” firms, but really, they’re funded trading firms–where you take less profits and shoulder all your losses–stay away from these firms.

Look for firms that have strong credibility and are transparent about the regulatory authority they are under. If possible, speak with employees of the firm as well as other traders. Remember, you’re interviewing them as much as they’re interviewing you. Prop firms are looking for high-quality talent–that’s you!

2. Education and Trading

While you don’t need a degree in high finance or advanced math to become a prop trader, that level of education can provide a helpful foundation. Some people who do get those degrees go on to work as institutional investors.

Certifications such as a Chartered Financial Analyst (CFA) or Financial Risk Manager (FRM) can enhance your industry knowledge and credibility, but they’re not a requirement for prop trading.

In the world of prop trading, nobody is checking your diploma. Prop firms want to know if you’re smart and self-motivated enough to acquire the right skills and follow disciplined strategies.

There are lots of online courses where you can learn the skills and strategies of day trading. 

3. Practical Experience

Prop firms may offer internships or trader-in-training programs to give you hands-on experience before you start trading on your own. Inquire about these programs to learn if they’re a good fit for your goals. 

Every prop trading program worth its salt should offer paper trading or a trading simulator where you can learn the trading platform and conduct trading activities without using real money. Once you’ve completed your initial training, you may be required to prove your trading prowess in a simulator. 

Trading simulators aren’t just a tool for evaluating new traders. Experienced traders use trading simulators to test new strategies, backtest theories, and study market behavior in a zero-risk environment.

4. Career Growth

As we said earlier, day trading is a meritocracy: if you have good ideas and can demonstrate a track record of profitable trades, you’ll go far. On the other hand, if you repeat the same mistakes without learning and improving, you’ll eventually run out of buying power.

Becoming a professional trader isn’t a function of reading blogs, watching videos, listening to podcasts, and chatting on forums with other traders. Chasing information is something that new traders do because they believe it will give them an edge. Experienced traders know that success comes from developing and following your trading strategy and risk management plan. 

That said, building relationships with other traders, especially traders who are more experienced and successful than you, can accelerate your career. Keep a humble attitude, ask questions, and take action when a mentor offers you feedback. 

And keep a trading journal! Professional traders document every trade and make notes about their strategy along the way. This is a major differentiator between amateur and professional prop traders