Prop trading - the essence, advantages and disadvantages
Prop trading is a young phenomenon in online trading. Prop trading is a type of investment in which a trader trades at the company's expense. In this case, the profit is divided in accordance with the agreement (most often in half), and the trader covers the losses with his own funds from the security deposit.
Let's look at an example. Let's say you have 1000 dollars. You conclude a contract with a prop company and deposit your thousand. Depending on the terms of the contract, they add a certain amount to your account, say half. Now you are trading for $ 2,000. Profit from trading is equally divided between you and the company. You cover your losses yourself. When losses reach the collateral amount, that is, in the example of $ 1,000, the account is blocked.
In fact, prop-trading is a kind of trust management, in which the company gives funds to the trader and does not risk anything. You can lose your thousand dollars, and a company can only earn.
Standard conditions for concluding a contract with a prop company
The terms of contracting vary from company to company. We will analyze the basic principles that are approximately the same for different market participants.
The profit received by the trader from most prop companies is divided 50/50, but there are exceptions. Most often these are young and yet not the most famous market participants who are trying to win their share of the clientele through marketing. The amounts that the company adds to the trader’s own funds can be either 2 times more or 10 times more than the security deposit.
Typically, the practice of concluding contracts by prop companies with novice and experienced traders is different. Beginners are offered to undergo paid training (standard practice), after which he trades under the guidance of other, more experienced colleagues. This continues until a person shows stable financial results in his trade.
Experienced traders are asked to show statistics of the trading account for a certain period to confirm professionalism and experience in the field of online trading. This information must be certified by a broker. Some companies ask for an investment password from the account.
Where it is more profitable to trade: with a broker or in a prop-company
To understand where it is more profitable to trade, you should understand the mechanism for calculating profits and making losses, depending on the trading system and the conditions of the prop-company. Let us analyze the situation using the example of the conditional $ 1,000 of own funds and $ 1,000 that the prop company added to the account.
Let's say you made a profit of 15% of the deposit. If you traded with a broker, your income would be $ 150. In prop trading, you would earn $ 300. Despite the obvious findings, the situation is not so clear. Suppose in another transaction you received a loss of 15%. In the case of trading with a broker, you will lose the same $ 150 and you will have another $ 850 left for trading. With a prop company, your loss will reach $ 300. If there are several such transactions in a row, the security deposit will burn 2 times faster than the money on the deposit with the broker disappears.
However, if you are confident in your trading strategy and assume that you will not have such situations, you can safely contact the prop-company to draw up a contract.
The main advantage of prop trading is the availability and the opportunity to start a career in the foreign exchange market for an absolute beginner, however, a considerable amount of tuition is required to be paid.
The disadvantage of prop trading is to increase the risks. Even if the company doubles your deposit, you proportionally increase the lot and, consequently, the risks. If your transaction turns out to be unprofitable, losses will only be borne by your capital, which is less than 2 times the amount that you laid down to calculate the lot.