Written By
G. Dautovic
Updated
September 22,2023
Table of contents
- What Is a Prop Trader Exactly?
- How Can You Become a Funded Trader?
- How Much Do Prop Traders Earn?
- Building a Career in Proprietary Trading
- Wrapping Up
- Frequently Asked Questions
In the ever-dynamic financial landscape, proprietary trading represents a specialized field where traders utilize the capital of prop firms, splitting the gained profits for potentially massive payouts.
However, leveraging outside capital also comes with high risk and the possibility of great losses. This is why a vast amount of knowledge of the market dynamics, trading strategies and various financial instruments remains paramount for becoming a successful prop trader.
What Is a Prop Trader Exactly?
A prop trader is a professional who trades in a variety of financial markets and instruments like ETFs, CFDs, bonds, stocks and even digital currencies, leveraging a firm's or the fund’s capital to earn profits.
These traders represent an integral piece of how investment banks, proprietary trading firms and hedge funds grow their businesses, with each of these three different financial entities offering unique operational environments and trading philosophies for prop trading.
Prop traders are not typically salaried employees but earn through a profit-sharing arrangement, with some firms offering minimal monthly salaries to aid focus.
Prop trading requires specialization in risk and asset management, making prop traders essential in maintaining market stability. Proprietary traders engage in market-making, ensuring market liquidity by acting as both buyers and sellers.
The profit-sharing percentages usually range between 50%-90%, depending on the firm's account options.
How Can You Become a Funded Trader?
Becoming a funded trader means trading with capital provided by a firm or individual, allowing for enhanced trading capacity and shared profits. Here’s how to become a funded trader:
- Choose a Legitimate Prop Firm: It is pivotal to avoid potential pitfalls and ensure a smooth trading experience by only opting to work with a prop firm with a strong track record, regulation compliance and a commitment to fairness.
- Open an Account: Try a demo or free trial option if available, and prepare yourself for the evaluation process.
- Understand the Trading Platform: Familiarity with the trading platform used is crucial for efficient trading operations. Most prop firms use MetaTrader 4 or MetaTrader 5 platforms for their operations.
- Maintain a Track Record: A proven track record is often required, showcasing your trading skills and market knowledge.
- Get Verification and Funding: Most prop firms will verify your trading acumen, and there are certain checks and licenses that you’ll need to complete the verification process. Afterwards, you can get funded and proceed with a fully funded trading account.
How Much Do Prop Traders Earn?
The financial rewards in Prop Trading are lucrative yet variable, influenced by multiple factors including the trader's skill level, the trading firm's policies, market conditions, and base salary.
Prop traders’ salaries can vary, with bonuses and other incentives often forming a significant part of the compensation.
The average salary for entry-level proprietary trader jobs can be around $90,000 while the most accomplished traders can make up to $500,000 per year.
However, we must note that the failure rates from prop firm challenges are very high, so it’s important to consider these statistics as well when evaluating prop trading as a career option.
Building a Career in Proprietary Trading
If you’re thinking about stepping into the world of proprietary trading, you’ll need to do your homework, really get to grips with the ins and outs of the market, and know the trading industry like the back of your hand.
- Acquire Comprehensive Understanding: Understand what prop trading entails, its mechanisms, and its role in the financial markets.
- Conduct Extensive Research: Delve deep into market research and understand trading in its entirety. A background in math, finance, economics, physics, computer science, or having a masters degree can be advantageous. Additionally, experience and proficiency in Python and other trading-related technologies is more than useful.
- Find Investors: Establish connections with potential investors or financial institutions willing to back your trading activities. This involves presenting a solid track record, demonstrating trading prowess, and showcasing an understanding of market dynamics, technical analysis, and fundamental analysis
- Assess Your Passion for Trading: Reflect on your interest in trading and the financial markets. Pursuing prop trading solely for monetary gains without a genuine interest can be overwhelming, unfulfilling and can lead to a great amount of stress.
- Evaluate Proprietary Trading Firm Offers: Investigate various prop trading firms, prioritizing those that are regulated and fully registered, as well as those that offer the best possible terms and rewards.
- Prepare for Trading Interviews: Be ready to confidently discuss your experience, trading skills, knowledge of the market, and preferred prop trading strategies during the interview process with potential firms.
- Get Ready for Licensing Exams: Prepare to take and pass the Securities Industry Essentials (SIE) and the Series 57—Securities Trader Representative Exam to become a licensed prop trader.
- Seek Mentorship and Guidance: Reach out to experienced traders for advice, insights, and guidance on navigating the prop trading landscape and enhancing your trading skills.
- Engage in Paper Trading: Before diving into live trading, practice with a demo account to build confidence and gain practical experience without risking real money.
- Start Live Trading with Real Capital: Once you’ve passed the necessary exams and completed other regulatory requirements, commence live trading with real capital in the actual market.
Before committing yourself to the prop trading sphere, it is also important to keep some considerations in mind.
For starters, it’s vital that you evaluate your risk tolerance, as the ability to navigate the highly volatile and risky markets requires an ability to withstand financial losses. As the saying goes, never trade with what you can’t afford to lose.
Because of the high risk involved, stress management and adept mental math skills become pivotal in the ability to properly cope with the constant pressures and uncertainties that are inherent to proprietary trading.
Wrapping Up
Becoming a prop trader, and more so building a successful career out of it, requires a strong commitment to strategic planning, risk management and the never-ending pursuit of knowledge. Only the cool-headed traders, those not too proud to adapt and change their approach and strategy over time, have a chance to truly secure their financial future.
FAQ
What is the average salary of a prop trader?
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The recent salary data for prop traders in the US shows that traders can make anywhere between $100k and $500k per year.
Do prop traders need a license?
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Yes, passing the Securities Industry Essentials (SIE) and the Series 57—Securities Trader Representative Exam is required to become a licensed prop trader.
How hard is it to get into a prop trading firm?
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It can be challenging due to intense competition, especially for new traders, and requires a combination of education, skills, work experience, and sometimes, an internship. Some statistics show that only around 4% of all potential traders get funded, making prop trading one of the hardest financial venues to break out in.
About author
G. Dautovic
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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