March 16, 2022

What Is Proprietary Trading?

Proprietary trading or prop trading refers to a trading desk or company that trades different types of assets (currencies, securities, digital assets) through their clients.

Proprietary trading or prop trading refers to a trading desk or company that trades different types of assets (currencies, securities, digital assets) through their clients. In this way, the company is able to profit from clients that execute trades rather than earning a commission on their behalf. 

In the next few sections, we will share with you all the details about proprietary trading. We will focus on how proprietary trading works, why it is becoming a very popular activity among traders and whether it is an activity that is worth trying for investors. 

What is Proprietary Trading?

Proprietary trading is one of the latest trends in financial markets. These are companies or firms that profit from trading activities conducted by traders. Rather than making profits with small commissions from traders (i.e. 0.5% of every trade), proprietary trading companies leverage their clients’ trading activities by allowing them to trade stocks, bonds, commodities and digital currencies. 

Proprietary trading firms let traders make a return on their investments and share the earnings with the company for which they are trading. Usually, the proprietary trading company gives some guidelines on how to trade and execute strategies. These guidelines could be very restrictive in some cases, this is why investors search and analyze different proprietary trading companies before deciding to start to work for one of them. 

Some of these traders could execute their own strategies. For example, they could find arbitrage opportunities, trade according to fundamental analysis or follow strict technical trends on different assets. In some cases, investors could even use fractals in order to find market opportunities in different types of assets. 

But what does it mean that the trader “works” for the proprietary trading firm? Basically, it means that the trader will be using the firm’s own money in order to execute the trading strategies that he considers the most accurate for a specific asset. Some traders can have their own forex trading strategies or follow the ones that would be shared by the prop trading firm. 

Despite the fact that investors can use the firm’s own money, there are strict limits and restrictions that apply. Usually, the firms would offer balances up to $500,000 (in some cases less than that) with a starting point of $10,000 to manage. In some cases, traders will have to pay a small commission in order to be able to start trading for them. 

If you want to know more about the top 5 best prop trading broker companies, then you should definitely read AltSignal’s guide on it. We tell you which are the best companies offering proprietary trading solutions right now and why they are among the best in the market. 

Proprietary Trading Costs

We need to understand that there will be costs for both the trader and the company that is searching for traders. The cost for the traders involves paying a small sum of money in order to get access to the firm’s capital. The larger the payment, the larger the sum that they would be able to manage. 

In this way, companies make sure that only professional traders with a clear interest and knowledge in the market would be managing the funds of the company. At the same time, the company makes sure that they have a small hedge against possible bad trades executed by the investor. Therefore, this also helps companies reduce their eventual losses. 

When it comes to the company’s risk and costs, you should know that they would be paying the trader. Every single time that a trader reaches its profit target, the company would only keep a small part of the winnings. In some cases, the winnings include 20% of the total profits made by the trader. 

But of course, the company is also taking the risk of working with traders that do not have experience in trading financial assets. This is why the company starts with the uncertainty of giving funds to a trader that they do not know and that might not be ready to take on the responsibility of trading over $100,000 in funds (in some cases). 

Some of the most professional proprietary trading firms in the market would only let traders start with small amounts of money (i.e. $10,000). If they see that they are able to reach the profit targets stipulated by the company, then they could be granted larger sums of money to execute their trading activities. 

The positive thing about proprietary trading for investors is that they do not need to be worried about commissions every single time they execute a trade. The commission will then be paid with their winnings. This makes trading activities more efficient over time and helps both the company and the trader focus on their strategy. 

Proprietary Trading Pros and Cons

There are many pros and cons of proprietary trading that are worth considering before we start using these platforms. These advantages and disadvantages will be closely related to how you use these companies and whether you are a good trader or not. 

Advantages of Proprietary Trading

These are some of the advantages of proprietary trading.

  • Users get to manage a large portfolio of funds
  • They can receive training from different courses offered by the proprietary trading company
  • Investors can execute solid strategies and have specific guidelines on the goals of the firm
  • The commissions seem to be attractive for both the trader and the company offering services
  • Proprietary trading firms offer a portfolio of assets that can be used by the trader to execute its strategies
  • Some proprietary trading firms let you trade with leverage
  • Traders can usually engage in trading different types of assets
  • Some trading firms would give you more flexibility in terms of trading strategies
  • This could be a great way to get trading experience with other traders and with larger sums

Disadvantages of Proprietary Trading

These are some of the disadvantages of proprietary trading.

  • Trading activities are strictly regulated by the proprietary trading firm
  • Users might not execute all their strategies as they please
  • Commissions are higher than if you would be trading with your own money
  • You might be constrained by restrictions imposed by the proprietary trading firm
  • Some assets might not be available for trading
  • Leverage might be restricted

As you can see, there are many advantages and disadvantages of proprietary trading firms. It highly depends on what you are looking for and the type of trader that you are. Moreover, if you are a trading firm, you should know that investors will be ready to trade with your money by following predetermined strategies that you set up. 

Example of Proprietary Trading Desk

Proprietary trading desks are platforms that offer proprietary trading solutions to traders and investors. Usually, these proprietary trading desks could be managing funds from institutional clients or they could simply be investors that decided to set up a trading company. 

Proprietary trading desks would have to be registered with local financial authorities in order to properly operate in the market. Furthermore, they have to create different partnerships with traders in order to manage different funds. 

Trading desks would also have access to different brokerage firms in order to process trades. It is not easy to set up a trading desk. However, there are several companies that are already offering these solutions to traders from all over the world. 

Therefore, a trading desk needs access to different markets, data analysis tools, capital (which could come from investors), regulatory approval and traders. Additionally, the proprietary trading desk should also have a clear goal, strategy and risk management. This would make it easier for traders to understand which are the goals and how to execute their strategies. You can also analyze some of the best crypto trading strategies in the market in order to understand whether you can apply them or not if you decide to start working for a proprietary trading desk. 

Proprietary Trading Firms

There are several proprietary trading firms available in the market. These prop trading firms would let you start managing funds, trade and follow different trading strategies to reach predetermined goals and profit targets. 

Each company is different and would have different rules that would apply to you. The following are just some of the most popular proprietary trading firms in the market right now. Let’s get into the details of each of them. 

  1. myForex Funds

myForex Funds is one of the largest options for investors and traders that want to start growing their portfolios and trade different assets and markets. Investors can manage a balance of up to $300,000 starting from as low as $10,000. 

Traders that want to start using myForex Funds would have to pay $84 in order to start using a balance of $10,000 and they can go to $200,000 if they pay $979. This company decided to use different phases in order to assess traders. During the first phase, the profit target is expected to be 8% and it goes down to 5% during the second phase. 

It is worth taking into consideration that this company is allowing traders to use leverage and make fundamental analysis. This could be a great way for investors to try different strategies depending on the type of asset they trade. 

  1. Fidelcrest

Let’s move forward with Fidelcrest. This proprietary trading company decided to offer a starting balance of €25,000 to traders for just €199. Now, if you want to manage a larger portfolio, you can do so (you can handle €500,000 for €1.449). 

This proprietary trading firm is also letting investors trade with leverage at a rate of 1:100. However, this option is just available to experienced traders in the market. Additionally, if the trader shows good and optimal results, they can scale up their capital to $1 million in just 12 months. 

Fidelcrest works with a model in which the profit share is at 40% with the trader. If you consider that there is an option to trade the news and perform fundamental analysis, this company would let you execute the strategy that better suits your needs. 

  1. FTMO 

We have another company called FTMO that is also allowing users to trade with balances of up to €200,000. You can start trading with this proprietary trading firm with a minimum balance of €25,000 and scale it throughout the months if you prove to be an accurate trader. 

Expert investors can use leverage at 1:100 in order to expand their profits if they need so. Moreover, there is also a possibility to trade news if traders consider that there is an opportunity that would let them reach their goals. 

Furthermore, the profit share is at 90% in some cases, which makes it very attractive for traders to reach the profit levels established by the proprietary trading firm. Finally, it is also possible to use different trading strategies according to the needs of the traders. 

This company focuses on forex traders. It could be a great way to start practicing by checking some of the best DXY Index Forecast for the coming months. 

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