Getting into the field of prop trading is more attainable than you might expect, especially today. Many prop trading firms offer beginner and experienced traders an opportunity to trade the markets with the firm’s capital and receive a share of the profits.
The process of getting a funded trading account from a prop trading firm is straightforward. Anyone interested can apply to work as a proprietary trader and get the opportunity to trade with a funded account.
This article will look at what proprietary traders do for a living and give you the details of how to become a prop trader and what you need to get started with the process. So let’s dive in!
What is a Prop Trader?
At its basic level, a Prop Trader is any individual who trades with a financial firm’s capital or other people’s money. Prop trading firms allow proprietary traders to use the firm’s capital to make profits and share the profit with the company based on a predefined arrangement.
Prop traders typically focus on one market or asset – stocks, options, ETFs, commodities, FX currency pairs, and futures contracts. Using the firm’s capital and various trading tools and services, their goal is to develop a structure and profitable trading strategies to receive a share of the earnings they generate through the day and swing trades.
Usually, prop trading firms do not pay their contractors a base salary. However, some proprietary trading firms pay a minimal monthly salary to help their prop traders solely focus on getting the best trading results.
That said, you will have a certain predetermined share profit taken from your monthly earnings. In that aspect, most prop trading firms offer a split profit percentage of around 25%-50%, although some firms have a higher profit distribution of up to 75%.
How Can You Become a Funded Trader?
Nowadays, getting into prop trading is easier and more affordable than ever before. Many remote trading firms have been offering their services to online traders who can trade from any location and with their tools and rules.
In short, to become a funded trader, you’ll have to apply for a funded trading program by filling out a form and informing the prop firm about your background, education level, and trading experience. Depending on the prospective prop firm, you might have to go through an interview process to discuss your trading skills, experience, the market you prefer to trade in, and the trading strategy you wish to use.
Once you have completed the application process and the prop firm has accepted you, you can start your evaluation period, which ranges between 30-60 days on most online proprietary trading firms. In this period, prop traders must prove their ability to generate profits and meet the company’s requirements to continue to the next level.
How Much Do Prop Traders Make?
So, the big question is how much can you make as a prop trader, right? Salaries for prop traders are variable across different countries and are mostly based on the trader’s performance.
In prop trading, bonuses are everything. As prop traders get paid by splitting their profits with the prop firm, they theoretically have unlimited profit potential. According to Comparably, prop traders’ salaries in the United States range from $42,373 to $793,331. The median wage of a prop trader is $203,679. According to ZipRecruiter, the average proprietary trader salary stands at $90,566 per year.
3 Ways to Build a Career as a Proprietary Trader
Some proprietary traders use a bachelor’s degree and take the regular route to enter the field; however, this is not necessarily required. There are different ways to get into the prop trading field, especially with the rise of remote work. These include:
1. Funded Trading Account – Becoming a Funded Trader
Over the last years, many trading programs have been designed to offer traders an online funded trading account. By applying to one of these programs, a funded trader can potentially receive a proprietary-funded account with the company’s capital.
Once the prospective trader is qualified and meets all the prop firm’s requirements, the trader gets access to a fully funded account with a specific account size and the company’s resources. Next, prop traders have an evaluation period in which they must follow certain predetermined conditions and risk management rules and guidelines.
While there are crucial factors to consider before applying to a funded trading program, funded trading is one of the best options for starting a career in trading. It enables you to immediately enter the markets without taking any risk of capital while keeping a large share of the profits for yourself.
2. Proprietary Trading Firm
The most conventional way to become a prop trader is to earn a bachelor’s degree, search for a top legitimate trading firm or an investment bank with positive reviews, and start the application process.
Top prop trading firms usually have an internship period of 6-12 months; during this time, they provide training and mentoring. Additionally, during the training period, traders are not required to maintain a profitable account balance.
Instead, they must learn risk management rules the prop trading firm sets, get all the expertise needed to master a certain market and develop a trading strategy and style. Typically, professional trading firms expect their prop traders to become profitable six months after starting their internship.
3. Find Investors and Get Trading Capital
Finally, another way to become a prop trader is to search for investors willing to fund your account independently.
Usually, to do that, you need a proven trading track record to show your potential investors you can generate profits for them. Further, this method requires connecting with large investors or hedge funds and getting capital via different networks.
7 Things to Consider Before Becoming a Proprietary Trader
If you are keen to start your career as a prop trader and you have found the way that is best for your trading needs, you need to take into account the following factors:
1. The Monthly Fee
Most prop trading firms charge a monthly fee for offering a funded trading account. After all, they are taking a huge risk by allowing other traders to use their capital, so the monthly fee balances their risk.
Normally, the participation fee on most platforms ranges from $100-$150 per month for using the firm’s capital and accessing its platforms and real-time data. In addition, some of these platforms also charge a one-time payment that ranges from $100-$1000.
2. Profit Split
Prospective proprietary traders are usually curious about the profit split percentage. Most prop trading firms in the industry offer a 50%-50% profit split.
However, some companies even offer a higher share profit percentage of up to 75%, which is the ideal profit split rate for a funded trading account.
3. Trading Guideline and Risk Management Rules
Every trading firm has different trading guidelines and risk management rules. This includes the maximum daily drawdown (daily stop-loss), overall drawdown, maximum transactions per day, daily and overall profit target levels, trade restrictions per market or asset, and many more.
If you are an experienced trader, you should carefully examine the trading guidelines to determine whether they match your trading strategy. If you are a new trader, we advise you to contact other traders who use the company’s services to confirm it is doable to make profits with the terms and conditions offered by the prop firm.
4. Trading Fees
Another crucial factor you need to consider is the trading fees and costs charged by the prop firm. Trading fees are a big deal for day traders who make 100-500 transactions in one trading day. In some scenarios, you may have a winning trading day, but you’ll end the day with a loss due to the fees you need to pay.
To solve this problem, ask the prop trading firm what the platform fee is, the trading fees for the chosen market you are going to trade on, and if there are any hidden fees or costs you need to know about (withdrawal fees, for example). Additionally, we suggest that you ask your prop firm if they have a rebate trading program.
5. Scaling Plan
Prop trading firms usually offer a scaling plan to enable the trader to grow and increase the account size based on the trader’s success. For example, a prop trading firm can offer an initial account size of $50,000, and allow you to increase your account balance as part of its program. If the trader succeeds in finishing the first evaluation period in profit, then the prop firm gives the investor the option to scale to the next level with a larger account size.
6. Basic Income
As previously mentioned, some prop trading firms offer a base monthly salary, though it tends to be relatively low and can affect your profit-sharing agreement. These base salaries are generally offered to cover traders’ basic costs and help them focus on their trading success.
Still, it is very unlikely to find a remote prop trading firm offering a base salary. So suppose you insist on getting a stable income, you will need to get accepted to one of the biggest prop trading firms in the industry and choose the traditional way of going to the office and working alongside other traders and managers.
Last but most importantly, ensure the prop trading firm has good user reviews and a positive reputation. Visit the company’s website to check its terms and conditions page and the trading agreement. Also, look at TrustPilot and other trading forums and websites to get an insight into the company and its services.
Becoming a Prop Trader – Pros and Cons
Like any other profession, there are advantages and disadvantages to choosing a professional prop trader career. Knowing the highs and lows of proprietary trading can be valuable for making a decision and help you make a smooth entrance to the field if you decide to take this path.
So, here are some of the main pros and cons you need to consider.
- Easy entry requirements
- Offers high earnings potential
- Exciting job
- Access to a large sum of capital, technological resources, and financial services
- A trader has no risk of capital
- Low trading fees
- You gain trading skills and learn your psychological strengths and weaknesses
- Many prop trading firms offer rebate programs
- High level of competition
- Usually, there is no basic income
- Prop trading is a highly stressful job
- Proprietary trading has become much more challenging due to automated trading machines and high-frequency trading (HFT)
- Some trading firms charge a high monthly fee
In conclusion, becoming a prop trader is a reasonably simple process. All you need to do is find a reliable prop trading firm offering a funded trading account and start your application. Through this process, you need to consider several factors such as the size of the account, the profit split percentage, the trading platforms and tools provided by the firm, and the monthly cost charged by the prop firm.
Once you do that, you can entirely focus on improving your trading skills with the support you receive from the firm’s mentors. Trading is hard, and it might take months or even years until you become a consistently profitable prop trader. However, getting access to a funded trading account is perhaps the most accessible way to become a professional trader and build a career as a trader.
Frequently Asked Questions (FAQs)
Do you need qualifications to become a proprietary trader?
Generally, you do not need a college degree or particular qualifications to become a prop trader. Proprietary trading firms normally do not have strict requirements regarding paper qualifications. Instead, they are looking for diversity on a team, and very often, each individual has a different background and experience.
How to get into prop trading?
There are several ways to get into prop trading. The first option is to search for a reputable prop trading firm, apply for a job, and start an internship if accepted. Otherwise, you can use a legitimate online proprietary trading service to get a funded trading account.
What is the purpose of proprietary trading?
For financial firms, hedge funds, and individual investors – the essence of proprietary trading is to utilize the company’s capital and other technological resources to execute an overall profitable balance sheet. They do not have any clients, and the only goal is to generate profits.
From the perspective of exchanges and financial market regulators, the purpose of proprietary trading is to add liquidity to the markets and develop a functioning market. For that reason, many prop trading firms receive monthly rebates from exchanges, which are proportionally given to their prop traders in return for adding liquidity to the market.
What is the difference between a hedge fund and a proprietary trading firm?
The key difference between a hedge fund and a proprietary trading firm is that the first uses investors’ capital to generate profits, and the second has its own capital to trade and invest.