Proprietary Trading (Prop Trading)

What is Prop Trading?

Prop trading, or proprietary trading, is becoming increasingly popular among traders worldwide. This concept allows specialized companies known as ‘prop firms’ to provide capital to talented traders. Traders use this capital to trade on financial markets, sharing the profits with the firm. This enables traders to access significant financial resources without risking their own capital. However, like any other financial market activity, prop trading carries risks. Besides the traditional prop trading, there are other versions like trading challenges or funded accounts. All these versions require traders to prove their worth before being entrusted with capital for trading.

Proprietary trading, or prop trading, is indeed available and legal in South Africa. It operates under the regulations set forth by the Financial Sector Conduct Authority (FSCA), ensuring compliance with relevant laws and providing protection for traders and market participants. Prop trading firms in South Africa use their own capital to let traders trade various financial instruments, including stocks, forex, commodities, and derivatives if they pass an assessment test.

There are several well-known prop trading firms in South Africa, such as Sabio Trade, FTMO, Topstep, My Forex Funds, City Traders Imperium, and others. These trading platforms / firms offer different opportunities, including funded trading accounts, where traders can access the firm’s capital and share the profits based on performance

How Prop Trading Works:

1. Find a Prop Firm: The first step is to find a prop firm that suits your needs.
2. Registration: Register on the prop firm’s platform.
3. Choose an Account: Select the account you want to use for trading.
4. Pay the Evaluation Test Fee: Pay the fee for a test that assesses your trading skills.
5. Pass the Test: Pass the test to gain access to trading capital.
6. Start Trading: Begin trading using the allocated capital.
7. Profit Sharing: Profits are usually shared with the prop firm in a ratio of 80/20 or 90/10 in favor of the trader.

The account cost is proportional to the amount of capital you can obtain after passing the test. For example, with Sabio Trade, you can pay 50 USD to unlock 20,000 USD for trading. With better accounts, this figure can go up to 200,000 EUR.

Risk Management in Prop Trading

Risk management is crucial in prop trading. Prop firms set strict policies to ensure traders do not take excessive risks. Common measures include:

• Daily Loss Limits: Restricting the losses a trader can incur in a single day.
• Overall Loss Limits: Defining the maximum losses a trader can accumulate before their account is suspended or closed.
• Strategy Verification: Analyzing and approving trading strategies proposed by traders.
• Continuous Education: Training programs to enhance trading skills and educate on best risk management practices – some companies require passing their theoretical courses first. There are many models.

Challenges in Prop Trading

Challenges in prop trading are assessment programs designed to test traders’ skills and discipline before granting them capital. These challenges often involve paying a fee, achieving specific trading goals under strict risk management rules. While they are presented as opportunities, some aspects of these programs can be considered unfair. Fees can be high, goals hard to achieve, and strict rules can lead to rapid trader elimination. Therefore, it is recommended to choose a prop firm without challenges.

Advantages and Disadvantages of Prop Trading:

Advantages:

• Eliminates financial barriers and provides access to larger capital.
• Increased earning potential for small traders with a lot of experience.
• Access to advanced trading tools.

Disadvantages:

• High performance requirements and pressure.
• Some prop firms set leverage in demo platforms for evaluation.
• Cryptocurrency traders may face difficulties passing the test phase due to daily limits.

Prop trading is becoming more popular for several reasons:

• It provides a unique opportunity for individual traders to showcase their skills without financial constraints.
• The profit-sharing model is attractive to traders.
• The development of trading technologies and increased access to financial markets facilitate prop trading.
• In an unstable economic environment, prop trading offers a way to maximize profits while diversifying risk.

Types of Assets Used in Prop Trading

Prop trading allows traders access to various asset types, including:

• Stocks
• Forex (Foreign Exchange)
• Futures
• Options
• Cryptocurrencies
• Commodities
• Indices
• Binary options

This diversity enables traders to diversify their strategies and maximize profit.

Conclusion

Prop firm trading presents an innovative opportunity for traders but requires advanced skills, discipline, risk management, and resilience to stress. Prop firms offer a structured framework, resources, and a collaborative environment that can help traders succeed.