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Prop Trading – Trading For A Firm

Keys To Success

Keys To Success


As you get into binary options trading and start building up a strong set of skills and techniques, you are actually opening a number of doors to possible career pathways. You can trade for yourself (the default option), but that is not the only option you have. Another alternative is to consider trading for a firm. This is known as proprietary trading, or “prop” trading for short. A lot of people talk about proprietary trading, but not a lot of people know much about it.

What is Proprietary Trading?

Proprietary trading is an unusual proposition, because you are trading money as part of a firm, but you are not acting on the orders of clients. You are choosing your own position using your own trading strategies. As a result, this is a high-risk activity, one which can be extremely lucrative if you manage to succeed—but most do not. You generally start out with a kind of “trial period.” If you blow it, you are often out in a matter of weeks or even days. Dodd-Frank legislation has created a lot of changes in the trading world. One of them is that proprietary trading is now allowed only for certain types of firms, so these opportunities are becoming less common.

Another reality of prop trading is that there is a great deal of variation between one firm and the next. As a result, it is hard to evaluate whether prop trading is “better” or “worse” than trading on your own. It may be better for you at one firm and worse for you at another. Or it may never be better for you. Or it may always be better for you. Your goals and assets have to be taken into account as well. Very similar to the way some traders do great with binary options brokers (source) and others do horrible.

Evaluate Your Situation First

Before you start looking at trading firms and whether it would be wise to join one, ask yourself the following questions:

What are your ultimate goals as a trader?
Will the binary options trading experience and other trading experience you have under your belt now be enough to transition to the type of trading you will be doing at a firm? Generally you will not be trading binary options at a firm, but the skills you have developed can translate into the type of trading you would be doing.

Do you have a well-established track record? Can you point toward actually data that displays your trading prowess?

Do you plan to become a full time trader? Are you one now? Do you have another job?
Have you graduated from college? What type of degree do you have? What other qualifications do you have?

If you start prop trading full-time or part-time, will you be making enough money to sustain the cost of living while you learn?

What general understanding do you have of the trading industry as a whole? Will it be enough for you to place your new role in context?

Do you have other handy skills like programming on your side?

Do you have the venture capital to get by on your own, or is that one of your roadblocks? This is one of the biggest challenges faced by a low of newbie traders. Just because your binary options broker lets you start with $200 does not mean that is suitable for profiting in any reasonable timeframe. A firm may be able to fix that.

What other personal roadblocks do you have that may be holding you back from trading on your own?
Is self-employment suitable for you, or would you be happier as an employee of a firm? Do you have a tough time staying focused and disciplined on your own, or would you feel constrained as part of a company?

Each of these questions is designed to help you figure out where you are now and where you want to be. There are certain advantages that trading with a firm can confer, but trading on your own also has its advantages. The question is what you need, and whether a firm can fill those gaps for you or not. Again, not all firms are the same, and one firm might be able to offer you more than another. Now let us take a look at the overall benefits and drawbacks of prop trading.

Advantages of Prop Trading

The firm backs you up. Instead of fronting all the money yourself, the firm does it for you. You get the advantage of the firm’s leverage as well. In essence, you can earn incredibly high returns because you are trading someone else’s money. If a lack of venture capital is your main holdup with trading on your own, this can be a massive advantage of going to a firm. They can make it possible for you to finally leverage your trading skills to make a living—something you would be able to do on your own if you had the capital to get started. Since binary options trading appeals largely to low-bankroll traders, I am guessing that this may very well describe you.

Some firms provide a trading strategy, also known as a structural edge. Basically, instead of letting you trade your own system, the firm provides you with one. Your job is to execute trades within the framework provided. If you have a good overall understanding of trading and are excellent working within a context, but are having a hard time finding a system on your own, this may actually work well for you. Sometimes firms that fit in this category also pay a salary.

A structured environment. If you do not enjoy being self-employed, simply working at an actual company and having bosses and co-workers may provide you with much-needed structure and support. Some traders fail on their own not because they lack the ability to trade or fail to understand trading analysis, but because they lack the self-discipline to make it. With someone else providing you with that discipline, you may well find that you are able to trade effectively and profitably.

Specialize in something that you actually excel at. As a binary options trader, you are familiar with the fact that there are many different ways you can trade—numerous assets and trade types. A firm can give you access to even more assets and even more types of trades. You may very well find that what you excel at is a certain type of niche trade that is not available to you on your own. In fact, you may discover new ways to trade that you never before imagined. This is one of the most exciting aspects of prop trading for many traders.

Better trading tools. If you are frustrated with low-quality trading platforms and are looking for something that will provide you with better data analysis tools, you might well prefer trading with a proprietary firm that can give you access to that technology. Cutting-edge technology enhances what you are capable of, and puts greater profits within your reach.

Low commissions. Since you have a background in binary options trading, you may not see this as much of a benefit. You may even few it as a disadvantage since you are not currently paying fees to trade. But if you are interested in branching out into other types of trading, you may prefer the low fees at a firm to the higher fees charged on retail platforms. Note that not all firms are fair with their commissions, so do your research!

Learning resources. I always advise that binary options traders hunting for a platform look for a broker that will provide them with lots of good training materials. Even the best training academy you are going to find in the binary options world does not compare to what a firm can offer you in terms of learning opportunities and mentoring. Imagine being able to attend seminars and workshops in person and work directly with traders you know have real experience and expertise, and who can demonstrate that to you directly.

Networking. Get to know like-minded professionals. Share what you have learned, learn from others, and explore career opportunities. Make the connections you need to get recognition in the trading world. As a bonus, you probably will befriend a lot of your coworkers. Trading is a career which involves unique pressures that can only be understood by other traders. Having someone to share the ride with can really be a big help when the going gets tough, and it can be nice when you have people you can relate to who are actually in the offline world with you and not living across the map or on another continent.

Disadvantages of Prop Trading

You cannot keep all your profits. You will split them with the firm. Whether this is a problem for you or not probably depends on your financial situation. Considering that you might be able to trade far more money with the firm than you could on your own, without assuming the risk, you may still end up making more money after the split. If that is not the case, though, trading with a firm may not be for you.

Those high-quality trading tools that you get to use may come with a price. Some (but not all) trading firms may pass on the fee costs for data feeds and trading tools to you, so that also comes out of your bottom line. The opportunity cost for those tools may be worth it to your or not, depending on how badly you need them and how much they enhance your bottom line.

The firm may tell you how to trade, including decisions like how much to invest on a position, and what trading method to use. Within that framework, there may be even more restrictions. Again, this is not the case with every firm or every position. There is a lot of variation here, and some firms will let you use your own trading method and make your own risk decisions.

Some firms may have high qualification barriers. While the most important thing to have on your side is experience and the trade records to prove you know what you are doing, proprietary firms may have additional requirements. You may need to take expensive exams and pursue a license. You also may need to have a college degree for some positions. Additionally, there is the possibility of having to relocate.

Getting started is an intense experience, and odds are good you will wash out. You could be out in a matter of days or weeks. This is very much a “trial by fire” type of gig. You need to be ready for that—as ready as you can be. This is not something to do on a whim. It is tough enough getting a trial period, and even tougher to get through it without the firm deciding to drop you. Note that if you do wash out, you may be invited to give it another shot in the future; it all depends on how well or poorly you did, and whether the firm believes you can eventually make the leap to professional trader.

There is a loss of freedom. Any time you trade in self-employment for a job with a company, you give up a lot of control. This not only includes control over your trades and position sizes, but also control over the shape of your day. You no longer get to call your own work hours and work days. Your time and space are dictated by someone else. You exchange your home work environment for the bustling environment of the trading floor. For some traders, that may be a great fit, but for others, it may not be acceptable.

So should you try prop trading or not? As you can see, the answer to that question depends entirely on what you want and need. Would a trading firm be able to fill in gaps in your knowledge and provide you with the capital and tools you need to succeed? Are you unable to furnish some or all of those tools on your own? Would a firm provide you with necessary structure, or deprive you of too much freedom? Weigh your answers to these questions, and then come up with a course of action.

One of the wonderful things about trading is that it is a flexible career. You might decide to try prop trading now or at some future date, and you might end up trading for yourself again afterwards. It is all up to you how you want to leverage your abilities for success!