What is prop trading?
Already know what prop trading is about? Read here on why Ikan Bilis Capital is the best prop trading firm out there.
Proprietary trading — commonly referred to as prop trading — simply means using a pool of funds from a brokerage firm instead of your own money for making trades. Just like retail trading, where the traders use their own money, prop trading allows the trading of wide range of financial instruments, such as stocks, derivatives and bonds. Ultimately, the goal of a prop trader is to make money for their broker, using the broker’s capital, which will give them a cut of the earned profits. This gives rise to the question — Why use prop trading when you can get 100% of the profits by simply using your own money? Well, there are multiple reasons. Let’s discuss a few important ones.
First and foremost — It is challenging to earn a lot of profits if you have a small amount of capital, but this only happens when you are trading your own money. Prop traders have access to a broker’s capital and so, the opportunity to invest larger sums of money. This not only increases the buying power of traders, but also their earning potential. Furthermore, a broker trades in massive volumes, hence getting a ‘wholesale’ price while entering or exiting trades, which makes prop trading far more cost-effective than trading your own money.
One of the most appealing factor about prop trading is that it limits the risk. Firstly, because it gives traders access to trading opportunities without risking their own capital. The traders are not liable for any losses, except for their own risk deposit, hence helping to build better risk management discipline. This makes prop trading attractive even for the traders who have huge personal bank balance. Secondly, brokerage firms don’t just let anyone use their money — they properly train the individual to ensure he is prepared to trade live. Also, the traders get to learn from other experienced traders working for the same broker.
Prop trading also provides more opportunities in the context of trading platforms and leverage. Retail clients are normally bound to one or two trading platforms because of the long and hectic registrations process combined with registrations fees. On the other hand, prop firms let traders choose from a variety of platforms. Another good reason for preferring prop trading over own money is higher leverage. Retail traders are limited by strict rules, whereas a prop firm normally gives you “unlimited” leverage. This, of course, depends on the agreement between management of the prop firm and the trader but is definitely a huge benefit for traders with small trading accounts. Specially, if you trade at the open, a prop firm is going to be a better option than retail in most cases.
Last but not the least, prop firms offer quick help and support since they are usually tight knitted operations that involve just a few people. Hence, they are a phone call away whenever you need an advice. One the other hand, retail brokers have thousands of customers and take hours and even days to respond.
At the end, it all comes to money and in majority of the cases, prop trading allows making more money than any other way of trading. Assume this: You invest 50k out of your own pocket, work really hard, and double your investment in a year — You now have 100k. In the opposite case, you invest 250M of your broker’s capital and make only 50% on it, that’s 125M. Let’s say you are allowed to keep 2% of actual investment and 20% of the profit. That’s a whopping 30M. Do the math — what’s better?
Using Ikan Bilis as a model, we have programs of four different evaluation tiers. Each of these tiers determines the amount of funds you trade on behalf of the fund as well as the maximum amount of funds you can trade. You will pass the challenge upon hitting the following criteria.
- Profit margin: 10% of account
- Max drawdown: No more than 5% of account
- Minimum number of trades: 20
- Maximum time to complete challenge: 60 days.
Our challenge is benchmarked against the other prop traders in the industry and we have set them to be extremely easy to pass. You can read more about it here.
Closing Thoughts:
Proprietary trading lets you diversify portfolio and reduce risk without using your own money. If you are someone who understands the risk, the pros of prop trading outweigh its cons. Do the due diligence, know the risks involved, practice before trading live and you are good to go! Interested to join the best prop trading firm that ever existed? Click here.
