Prop trading, or, in layman’s terms, proprietary trading, refers to the practice where traders are allocated a specific amount of money that they wouldn’t have access to if they went about trading by themselves.
Once traders trade and derive profits from the financial markets, a profit split happens based on the prop firm’s business model.
Over the last few years, this mode of trading has become increasingly popular worldwide, with many aspiring traders choosing to partner with proprietary trading firms as opposed to conventional hedge funds and investment banks.
If you have been thinking about joining forces with a prop trading firm, I implore you to read through this comprehensive guide to help you select the best prop firm that will satisfy your trading requirements.
Selecting a Prop Trading Company: What to Consider
1. Research the Strategies used by the Prop Trading Firm.
No two prop firms are the same; every firm has its own unique set of trading practices, techniques, and strategies.
So, it’s important that you take time to study the FAQ sections and the “Terms of Use” for the different prop firms that you wish to explore to ensure that the trading techniques they use align with yours.
There’s nothing as painful as purchasing an evaluation account only to find that the prop trading firm’s strategies don’t align with yours.
2. Have an Excellent Understanding of your Trading Techniques
Before joining a prop firm, you need to ask yourself a couple of questions, starting with, “Are you a day trader or a long-term trader (swing trading)?” “Do you prefer trading forex or futures markets?”
Asking yourself these questions is essential to helping you narrow down the list of potential prop trading firms that you are willing to consider.
3. Assess the Prop Firm’s Risk Management Policies
If you are a trader, I am certain that by now you know how much inherent risk trading carries. With poor money management, you can blow your account in a matter of seconds.
Thus, when considering prop trading firms to join, you need to be on the lookout for a firm that has implemented practical risk management policies to help protect their capital and ensure the longevity of their traders’ accounts.
4. The Prop Trading Firm’s Capital Allocation
One of the major perks of partnering with a proprietary firm is the opportunity to gain access to huge amounts of trading capital. However, it’s worth noting that different trading firms have different methodologies for allocating their trading capital.
Some may be open to granting access to their funded accounts without the tedious process of taking you through vigorous evaluation faces, while others may require you to undergo up to three evaluation faces before they can give you access to their funded accounts.
Always be honest with your trading experience, and only work with firms that can conform to your trading experience level.
5. Check the Prop Firm’s Reviews
If you are like me, then before subscribing to any service or purchasing any product online, I always check for reviews. The same concept applies to prop trading firms.
Take time to scour the internet with the goal of ascertaining that the firm’s reputation is clean and that they indeed process payouts and deal respectfully with their clients.
Extracting profits from the financial markets is hard. So, the last thing you need is to finally come across some decent profits only to have the prop trading firm start shifting goal posts when you request your payout.
6. Ask about Support and Training Opportunities.
Trading is one of the few skills that, if mastered, can help you compound your money until the day you kick the bucket. So, you want to be part of a team that goes out of their way to educate their traders, since it will help improve your trading skills.
You also want to pay attention to the responsiveness of their customer support team. Imagine having a pressing issue that needs urgent assistance, only to receive a response after days on end. It was not exactly the best experience, if you ask me.
7. Evaluate the Prop Trading Firm’s Fee Structure
To become part of a prop firm, you either must pay a one-time payment or get a monthly subscription that runs monthly. Your account will be debited if you fail to attain the trading targets of the purchased evaluation accounts.
The trade-off is that some prop trading firms will offer prospective traders very enticingly low fees but then demand significantly high profit targets, which becomes challenging for novice traders who are just getting into the game.
8. Be Aware of the Prop Firm’s Profit-Split Policy
It’s common practice for profit sharing to be the norm in prop firms, where traders split their profits with the trading firm based on preset terms and agreements. It’s essential to align yourself with a proprietary trading firm whose profit-sharing policy meets your financial expectations. One last thing: always remember to check whether there are any underlying terms that may inhibit your profit withdrawals from firms that offer high profit splits.
9. Check out the Size of the Prop Trading Firm.
Certainly, a smaller proprietary trading firm can allow you to enjoy tailored and personalized support, which is crucial if you are getting started in the prop trading world. The other side of the coin is that a larger prop firm will offer the best in terms of educational resources and developmental opportunities.
In the end, it all boils down to what you want to achieve out of your prop trading journey. Once you have a clear vision of what you wish to achieve, then choosing an excellent prop firm becomes a breeze.
