How to Become a Prop Trader

Prop trading firms typically employ experienced traders who have a deep understanding of market dynamics and trends. These traders use various sophisticated trading strategies, algorithms, and risk management techniques to identify profitable trading opportunities across different asset classes, such as equities, fixed income, commodities, and currencies. Prop trading can be highly lucrative for both the firm and the traders, as successful trading strategies can yield substantial profits.

Now, let's find out how to become a prop trader.

Understanding What Prop Traders Do

What is a prop trader exactly? “Prop” is short for proprietary. Proprietary trading — also called day trading — is a type of trading where a financial institution uses its own money for trading. This is in contrast to more traditional trading firms that use client funds to generate profits.

Prop trading can be risky for the financial institutions involved; prop traders played a significant role in the 2008 financial crisis. However, it does mean that those institutions keep more of their profits.

To generate high profits, prop trading firms must be extremely selective when it comes to choosing the people making their trades. Prop traders execute trades for their respective firms and almost always earn a higher percentage of profits than traders for more traditional firms. This requires strong analytical skills, the ability to make decisions under pressure and keen financial knowledge.

Some prop trading firms offer their traders a base salary. Others pay in commissions only, which can make the job extremely stressful. However, if you’re a very skilled trader, even commission-only pay can end up being lucrative.

The working environment for a prop trader can vary significantly. Some firms have offices where traders work in-house. Other traders can work remotely with online firms, trading as much or as little as they wish.

Steps for Becoming a Prop Trader

You can take several key steps to become a prop trader.

Building a Solid Trading Foundation

If you’re just getting familiar with trading, a prop trading firm is generally not the place to start. Before you start trading with a firm’s money, you will need to have a solid background as a trader — both theoretically and in practice.

You’ll need to understand various trading strategies, how they work and when to use them. But you’ll also need to demonstrate that you’ve used these strategies successfully as a stock trader, whether through foreign exchange, stocks or options.

Mastering Relevant Skills

No matter what kind of trading you do, you need to cultivate relevant skills if you want to be successful. Here are some of the most important ones:

• Developing a thorough understanding of the financial market and how it works
• Sharpening analytical and quantitative skills
• Having a logical, balanced risk management strategy
• Developing the ability to make decisions under pressure

In many cases, prop trading firms want you to have a degree — or at least some educational background — in finance. Make sure you understand what a given firm is looking for before applying.

Gaining Experience

Before a prop firm trusts you to trade its funds, it may evaluate your abilities and background. If you want to pass the evaluation, you should take every opportunity to gain experience in trading. Networking to find mentors, participating in trading competitions and practicing with trading simulations can all be good strategies.

Choosing the Right Proprietary Trading Firm

Not all trading firms are the same. Some variables to consider when choosing a prop trading firm include:

• The central goals of the firm
• The trading strategy it tends to use
• Any support or training it offers
• How much you need to pay in fees
• How much funding you may be allowed to trade
• What the firm emphasizes in its evaluation

Make sure to take your time when choosing a firm. The right choice can earn you substantial profits, but the wrong choice can cost money.

Acing the Interview and Evaluation Process

Before you enter the interview and evaluation process, make sure you’re familiar with what firms are looking for. You may be asked technical questions about trading and questions to see whether you have the right behavioral traits to succeed.

Firms also look for people who have a genuine passion for trading. Make sure you emphasize both your background and your enthusiasm.

Embracing Continuous Learning and Improvement

A great trader never stops learning. To succeed as a prop trader, you’ll need to stay updated on market trends, trading strategies and algorithmic trading. Following podcasts featuring successful traders, reading books about trading and following industry-related news and communities could be great places to start.

Overcoming Challenges and Staying Resilient

Prop trading is an inherently risky industry. But the worst thing you can do when you hit a bump in the road is to give up. If you want to succeed, it’s important to persevere and work to learn from your mistakes. If you make a point of learning something each time you hit a loss, your trading skills can grow despite setbacks.

Understanding Costs and Fees

Before you start prop trading, keep in mind that there’s some level of financial investment for new traders, including:

• Subscription Fees: Fees for funded accounts vary widely, starting as low as $150 per month to as high as $25,000 and up.
• Withdrawal Fees: You may have to pay a small percentage of your earnings each time you make a withdrawal.
• Evaluation Fee: Many prop trading firms charge a one-time fee to evaluate your trading abilities.
• Software Fees: Some firms charge you a monthly fee to use their trading software.

If you’re a successful prop trader, you’ll probably find that the fees you pay are a small percentage of what you earn. However, if you’re unsuccessful, you may be out of more money than you started with. Some firms may take more of your profits than others, and you will want to keep an eye out for hidden fees.

Before pursuing this career, it’s important to be honest with yourself about your skill level and experience as a trader.

Pros and Cons of Becoming a Prop Trader

Prop trading can be lucrative, but it isn’t for everyone. If you’re considering getting into the industry, consider these pros and cons.

Pros:

• Doesn’t involve your own money when trading
• Brings the advantage of a prop trading firm's built-in risk controls
• Offers access to your share of the profits with weekly payouts
• Provides the ability to trade in a wide variety of markets

Cons:

• Is often extremely stressful
• Is typically high-risk
• Involves sharing profits with the firm you work for
• Limits the trading strategies you can use

If you have the right personality and skill set for prop trading, the benefits can outweigh the risks.

Is Prop Trading Right for You?

If you find success as a prop trader, you can earn a great salary while sharpening your trading skills in a variety of markets. However, because of its challenges, prop trading is a career best saved for people who genuinely enjoy trading and not those who are just in it for the money.

If you’re an experienced trader with a track record of success, you might be able to take your career to the next level with a prop trading firm.

Frequently Asked Questions