Proprietary trading, also known as prop trading, is a business model in which traders or trading firms use their own capital to place bets on financial markets while providing trading services to clients.
As more individuals and institutions look to access global financial markets conveniently through online and digital platforms, proprietary trading has become an increasingly popular way for experienced traders to generate income through capitalizing on short-term price movements.
If you're thinking about getting involved in prop trading but aren't sure where to start, this guide will walk you through the basics of how it works.
Things to Know About Proprietary Trading
While online propriety trading provides many benefits to indie traders, certain important factors should be understood:
Capital Requirement: Allocating sufficient risk capital is essential for any trading strategy to have the necessary edge to produce worthwhile returns consistently. Undercapitalized traders will struggle.
Risk of Loss: As with all speculative trading, proprietary trading involves substantial risk of financial loss because no strategy works all the time in live, volatile markets. Traders must accept this risk and have risk management disciplines in place.
Time Investment: It takes considerable time to research markets, develop strategies, fine-tune them through backtesting and demo trading, manage open positions and review performance thoroughly. Proprietary trading is not a "get-rich-quick" scheme but rather a career that requires ongoing learning, testing and refining over many months or years of experience to have an edge.
Regulations: Online traders need to ensure they understand all rules and regulations that apply in their resident jurisdiction regarding things like taxation of trading profits/losses, permitted financial instruments and licensure requirements for operating as a professional trader.
Liquidity/Spread Risk: Some instruments like thinly-traded securities, penny stocks or currencies with wide spreads present risks of inability to enter or exit positions quickly at desired prices, making it difficult to effectively implement strategies in such products. Only highly liquid markets suit proprietary trading.
Technology Risk: Reliable internet access and functionality of online broker platforms are essential. Technology issues could interfere with proper trading execution, position monitoring or account management. Traders should have contingency plans.
For those with sufficient capital, time and understanding of both financial markets and proprietary trading as a business, it can be a worthwhile long-term career path.
But prospective traders must realistically assess their abilities and willingness to handle risks before starting out.
How Does the Proprietary Trading Process Work?
At a basic level, the process of prop trading involves the following steps:
1. Capital and Account Setup
Traders either fund their own proprietary trading activity or receive capital from a trading firm in exchange for a revenue share agreement. Trading accounts are opened with brokers that provide advanced trading platforms and capabilities.
2. Market Research and Strategy Development
Traders analyze financial markets using technical analysis, fundamental analysis and other approaches to identify short-term trading opportunities. Well-defined strategies focused on specific assets and timeframes are formulated.
3. Order Placement and Execution
Using brokerage platforms and direct market access, traders implement their strategies by placing buy and sell orders to establish either long or short market positions based on anticipated price movements over minutes, hours or days.
4. Risk and Position Management
Active risk management techniques like stop-losses are employed to limit losses on open positions. Traders closely monitor markets and manage position sizing based on strategies.
5. Trade Closure and Profit/Loss tallying
As price targets are met or views change, traders exit positions by offsetting them with opposite trades. Profits and losses from each trading period are calculated.
6. Performance Tracking and Analysis
Traders review trading performance data like profit factors, drawdown and risk/reward ratios to refine strategies. Losing streaks may require strategy tweaks while success gets strategy optimization.
The proprietary trading process aims to generate consistent profits by exploiting short-term pricing inefficiencies in financial markets through the implementation of well-researched strategies on allocated trading capital. Disciplined risk management is also crucial since traders are risking their own funds.
How to Do Online Proprietary Trading?
While large financial institutions have the resources for fully automated and co-located trading systems, online proprietary trading is certainly possible for individuals from home as well.
The first step is to open an account with a reputable brokerage that offers direct market access for placing trades. Fees should be minimal to non-existent for serious traders.
Carefully research potential brokers and compare things like commission costs, minimum deposits, available markets and order types, platform features, and any trading restrictions. Customer service quality also matters a great deal.
A good choice for international traders is Jetonbank, a digital banking platform that facilitates electronic banking transactions worldwide through regulated financial licenses.
Whether trading stocks, options, futures, or forex, use a proper trading platform that supports your strategy.
Popular options include MetaTrader, NinjaTrader, and TradingView. Spend ample time getting familiar with how order entry, charts, indicators, and analytics work on the specific platform before risking capital. Paper trading is highly recommended during the learning process to avoid costly mistakes.
Developing a clear trading plan that outlines your style, instruments, position sizing rules, risk management, and profit targets will put you far ahead of most amateur traders.
Use technical indicators and patterns that have proven themselves through rigorous backtesting on historical data. Always trade with a verified edge and cut losses quickly on losing trades to preserve capital for the next opportunity.
Who Can Benefit from Proprietary Trading?
While large Wall Street firms have whole divisions dedicated to prop trading, the possibility is also there for independent or small group traders.
In general, those with certain traits have the highest chances of success in this endeavor:
- Technical analysts - Thriving in prop trading requires identifying repeatable market edges through charts, indicators, and patterns rather than fundamental analysis of individual companies. Trading psychology and stick handling losing trades are also crucial.
- Disciplined individuals - Loose traders who disregard stops or position sizing will struggle. Rigid adherence to a verified plan no matter the conditions is key. Boredom and overconfidence are dangerous enemies.
- Tech savvy traders - Automating strategies, scraping data feeds, and leveraging platform features give quant traders an advantage. Comfort with coding and algorithms opens new worlds of potential market insights.
- Experienced professionals - While no experience is strictly required, an educational or work background in finance, programming, or quantitative fields provides a running start. Formal training helps minimize the inevitable learning curve.
- Those with capital - Smaller account sizes limit potential profits and constrain position sizing. For persistence in drawdown periods typical of short-term trading, higher balances provide more breathing room.
Disciplined technical traders, quantitative analysts, and experienced professionals tend to do best focusing their efforts full-time through proprietary trading.
But part-timers can also find ways to participate successfully.
Can You Make Money with Proprietary Trading?
The multimillion dollar annual pay packages seen by star prop traders at major banks give the impression that huge wealth is attainable.
In reality, consistently profitable proprietary trading takes years of refinement. Most traders - even professionals - will lose money initially as they strengthen their skills through experience and education.
A few key points on realistic profit potential:
- Consistent double-digit annual returns are very achievable for skilled traders, far outpacing the stock market. Returns over 20% per year are certainly possible but also involve higher risk levels.
- Small but steady monthly gains of 1-3% compound remarkably over the long run. Focus should be on preserving capital, not swinging for home runs with each trade.
- Full-time independent traders can generate mid-six-figure incomes after several years if not more practice and strategy development. Multi-million dollar fortunes are rare for retail traders.
- Hedge funds and prop trading firms employ teams that pool resources for larger position sizing. Their returns must also cover overhead, so advertised performances might not strictly apply to individual traders.
- Losing periods are normal but keeping drawdowns relatively small is key to surviving long enough for the inevitable winners to materialize over time. Money management is more crucial than anyone's ability to pick tops and bottoms.
So while media stories highlight the rare millionaire prop traders, making a career out of trading through consistent, risk-managed returns is more realistic for most.
Multi-year track records showing net profitability are required before quitting a day job. Trading part-time around an existing career can also work well for some. With perseverance and humility, proprietary trading offers a viable path to supplementing or even replacing traditional income.
Proprietary trading done properly affords institutions and experienced individuals opportunities to benefit from short-term price trends across global markets.
Though challenging and rarely providing instant riches, developing robust quantitative strategies and controlling risk offers a professionally rewarding use of one's analytical skills. For those with compatible traits and patience for a long learning curve, exploring prop trading may open new doors.
A trustworthy platform like Jetonbank provides all the necessary tools and regulatory compliance to safely give this field a try.
Start by thoroughly researching proposed methods, keeping strategies simple, using low-risk paper money simulations for extensive testing, and always remembering that risk management comes before chasing returns.
Progress step-by-step through practice without stressing short-term performance. With dedication and an open mindset, proprietary trading holds potential for supplementing incomes or becoming a full career in its own right.
