What are the advantages of prop trading firms?
Excellent Forex trading advantages without requiring you to risk your own capital
Forex trading is all about leveraging capital. Earnings in Forex trading are expressed in pips (percentage in point), meaning your profit is calculated in values of £0.0001. Therefore, you are unable to make tons of money if you are not making huge deals. Of course, you can use your leverage to achieve much greater exposure, but you still require substantial amounts of capital to make deals that matter.
Greater exposure and larger capital deals are also accompanied by some downsides. Firstly, you cannot use your capital for other means while simultaneously trading it within Forex. Secondly, you are risking your own money, and believe us, there is always risk involved. Third, and possibly most importantly, most people do not easily gain enough substantial capital to make a difference in Forex trading.
What are proprietary firms?
Proprietary trading refers to the operations of a financial firm that provides capital to Forex traders. Rather than earning a commission based on trades, a prop trading firm makes an agreement to split profits with the trader. Most often, a prop trading firm proposes a 50% split.
The Forex trader offers their skills and time, while the proprietary firms provide the capital and bear the entire risk of capital loss. The FX trader earns 50% of the profits for their efforts, while the prop trader firm earns the other 50% while running the risk of losing the provided capital.
Proprietary trading, therefore, is one of the most profitable trading operations for both the trader and the firm. It is a joint agreement that can also be an advantageous collaboration.
Providing trading capital does require conditions
Of course, a prop trading firm needs to turn a profit, and is looking for FX traders with the right skills to find beneficial trading opportunities. Therefore, a prop trading firm must select the most skilled traders to successfully complete Forex trades. Proprietary trading firms use three different methods, or a combination of the three, to limit their risks:
1. Initial trading exam
Many proprietary firms will execute an initial trading exam for all Forex traders who wish to join the prop trading firm. In this way, a trader can prove their Forex trading knowledge. This exam keeps out the traders that have just begun trading or are inexperienced with trading theory.
Although an initial trading exam at a prop trading firm can be highly effective, many excellent traders are left out because of this initial exam. Some traders cannot perform under the pressure of a structured assessment, or do not speak the language well enough when tested. Above all, Forex trading is a profession of praxis and experience. Many experienced Forex traders have learned their profession on the trading floor, rather than from books.
Therefore, the initial trading exam limits the risks for many prop trading firms but filters out potential opportunities to fund many excellent traders.
2. Demo account
A demo account is also a commonly used method among prop firms to assess which traders are up for the job. With a demo account, a realistic trading market is simulated based on actual historic data. It gives a trader the opportunity to show how they perform based on realistic market conditions. When a trader reaches their virtual profit target, they qualify for the job and are provided with a real trading account.
A trader is commonly someone competitive and eager to earn money. An artificial demo account does not provide an environment with accurate, high-stakes trading conditions. Most of the time, results are achieved under pressure and with increased amounts of adrenaline, while one’s trading capabilities are pushed to the limits. Therefore, trading on a demo account often feels like a training session without the risk of consequences.
A demo account can limit the risks for a prop trading firm dramatically, as the firm is able to select the candidates who achieve positive results on their demo account. However, they do not know how candidates will perform under actual stress, trading with a million pounds sterling of real money. The firm may be ruling out excellent traders that just need the adrenaline of the trading floor to perform.
3. Trading parameters
Another method of funding money by a prop trading firm is by establishing monetary parameters while traders are participating in the real market. The most three common parameters are:
A profit target is set, often in combination within a certain time frame. The profit target is usually dependent on the trading style. Aggressive traders often have a higher profit target compared to low-risk traders. When this profit target is not met, the Forex funded account is terminated by the prop trading firm, as the Forex trader has not been able to reach substantial profits for itself and the prop trading firm.
Stop out level
A stop out level is an important measure to limit the risks for prop trading firms. When a certain amount of capital is lost, often expressed as a percentage of the total capital or a fixed amount of capital, then the Forex funded account is closed. Often, aggressive traders are allowed to suffer larger losses, as more aggressive trading strategies can yield greater losses.
Prop trading firms will also analyse the consistency of one’s trading style. Most of the time, a trader is not allowed to switch trading styles as it might involve unacceptable risks. Inconsistencies do not often have immediate consequences but might result in well-meant advice on developing a more consistent trading strategy. More consistent trading strategies have proven to be more effective and profitable compared to inconsistent trading strategies.
Besides, prop trading firms typically also put conditions like a maximum amount of leverage (1:5 or 1:10). Also, a prop trading firm might limit the possible currency pairs that are traded. More exotic currency pairs are also accompanied by more risks and are therefore excluded from trading.
Forex funded account
As prop trading firms remain the owner of the capital, they commonly set up a Forex funded account on a trading platform of the broker of their choice. Their FX traders receive access to make the deals that they foresee to be profitable. The proprietary firm remains in control of the account and can control their own capital.
As a Forex trader, you are ensured guaranteed capital if you perform within the set parameters. Prop trading firms know like no other that Forex trading involves risk. Therefore, you are allowed to lose money with some trades without consequence. However, you will have to show that you are following a profitable strategy in order to keep their trust in you with their capital.
Access to knowledge
Often, Forex prop trading companies offer access to enormous resources regarding Forex trading. Not only do you have access to effective strategies and Forex trading courses, you can also consult senior experienced traders with a lot of experience in Forex trading.
You can always learn a lot from successful traders as they can always advise you if your trading strategy will be effective and give you insight in how to make more profitable deals. When you are part of a Forex trading community you are not alone and can always find valuable insights into the market.
The advantages of prop trading firms
As an individual Forex trader, prop firms can give you the following benefits:
- No need to risk your own capital
- Increase your exposure with higher amounts of capital
- More profit as your trading position becomes substantial
- Rational trading of capital excluding emotional decisions
- Access to knowledge of trading community
Are you interested in a Forex funded account of a prop trading firm? Forex Traders UK is a UK-based prop trading firm that provides you with a funded Forex account. Forex Traders UK does not work with initial trading exams or demo accounts, and you can start trading with real money on the trading floor immediately.
You will be provided with a certain starting capital and your capital will be quadrupled the first time you hit a milestone, and it is doubled every succeeding time you hit a milestone. Forex Traders UK provides you with a guaranteed capital of £1 million when you show constant profit levels with a consistent trading style, no matter you are an aggressive or a low risk trader.