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Prop Trading: An Overview


By now, the world of online trading requires no further introductions. Proprietary trading, however, may still come as news to some.

Prior to the early 2010s, most people would have considered stocks and forex trading the exclusive domain of Wall Street. That was until online retail brokers emerged, permitting anyone with a computer to access the markets.

Prop trading, just as regular trading, existed long before it publicly announced itself. But what is it?

The Function of Prop Firms

In the absence of luck, insider information, or semi-apocalyptic market shocks, there is no fast track to a windfall when it comes to trading. For the most part, it’s about diligently grinding out decimal price movements, aiming for modest growth. It requires two major assets – discipline and funds. The first can be cultivated but the second is a much slower process.

Prop firms aim to circumvent the funding obstacle. They can be thought of as third-party investors who essentially sponsor traders in return for a share of any profits the trader generates. This is the premise of prop trading in a nutshell.

Understandably, the investors would want to verify the competence of the traders selected for the task. That is why, traditionally, this type of partnership was reserved for closed circles. But just as, through the advances of technology, retail trading found its way to the masses, so too has prop trading.

Rather than exclusively depending on partnerships with established traders, prop trading firms such as Ultimate Traders evaluate individuals based on the merit of how they perform on a simulated account.

This is known as the challenge model of prop trading. During the challenge, if the trader can reach a specified profit target without incurring substantial losses, they earn the right to trade the firm’s capital.

Firms partner with established brokers who host the trading accounts, to ensure an accurate and unbiased market environment. For example, Ultimate Traders use T4Trade as their host broker. The agreed profit split is 80% for the trader and for the 20% firm, with an option to increase to 90%.

Ultimate Traders Evaluations

The Ultimate Traders evaluation requires a registration fee proportional to the account size the trader would hope to receive. For example, registering for a funded account of $10,000 costs $99 through the Classic Challenge and $129 through the Speedy Challenge. Registering for the largest funded account of $400,000 costs $1799 through the Classic Challenge and $2199 through the Speedy Challenge.

The fee is refunded upon the first withdrawal from the funded prop trading account, should the trader progress to that stage.

Besides price, the key practical difference between the two challenges is that the Classic is a 2-phase evaluation while the Speedy is a 1-phase one. The 2-phase evaluation emphasizes consistency, the 1-phase emphasizes proficiency. This can be inferred by analyzing the rules of each challenge.

The rules of the Classic Challenge require the trader to grow the account balance by 10%, without exceeding a 6% loss in a single day, and without ever exceeding a 12% loss. Once achieved, the balance is reset and a similar objective must be met, but with a requirement of only 5% growth this time. By replicating the results in this way, the trader demonstrates that they will be likely to generate profits more times than not.

The rules of the Speedy Challenge require the trader to grow the account balance by 10% just once, however, this must be done without exceeding a 4% loss in a single day, and without ever exceeding a 6% loss.

Here, despite the closer finish line, the margin for error is much smaller. So, a trader participating in this challenge must demonstrate astute knowledge and risk management to succeed.

To summarize, both evaluations are designed to give the prop firm confidence in those who pass through to the funded stage. Once funded, there are no further profit requirements; traders can work at their own pace.

For risk management purposes, the drawdown rules still apply. However, the all-time loss limit eventually stabilizes at the level of the original account balance; so, providing the equity never drops below the starting balance, funded traders mostly need to concern themselves with the daily loss limit.

Trading Conditions, Strategies, and Add-ons

The instruments available to prop traders are not just limited to currency pairs. Ultimate Traders allows forex trading, commodities, indices, and cryptos. The maximum leverage for forex is 1:100 on the Classic Challenge and 1:30 on the Speedy. Permitted trading strategies include scalping, hedging, news trading, expert advisors, and generally any fair strategy that can be replicated over the long term.

Swing trading and weekend holdings are permitted if the trader purchases the necessary add-on upon registration. Other available add-ons include ‘no stop-loss’ and ‘90% split. As the name suggests, the ‘no stop-loss’ add-on allows for the opening of positions without the otherwise mandatory stop-loss. And the ‘90% split’ (touched upon earlier) increases the prop trading split from 80/20 to 90/10- in favor of the trader.

Summary

Prop trading provides an alternative option to consider for all traders. Understandably, some may still prefer to trade their own capital, given that the challenge presents as a barrier to funded trading, as well as not being confined by drawdown concerns should they wish to operate more aggressively. In addition, they would keep 100% of profits instead of 80% or 90%.

On the other hand, the risk-management protocols for some may be helpful, since the reason many traders opt to operate more aggressively is due to unsatisfactory results when cautiously trading a smaller balance.

A prop firm can provide substantial capital where cautious trading can still equate to significant gains, making the profit share negligible. This is in addition to the benefit of the firm bearing the risk of losses in the market.

As with anything, there is a give and take. However, for traders aspiring to operate larger trading accounts without diving into their own banks, prop firms such as Ultimate Traders now provide the possibility.

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