Proprietary trading enables traders to borrow more significant capital from financial institutions and share the profits instead of using their funds. But prop trading doesn’t come without limitations. This simple guide will help you learn everything you need to know about proprietary trading.
Understanding Proprietary Trading
Proprietary trading (prop trading) is a fast-growing practice after forex and other trading options. It allows financial institutions, such as banks, hedge funds, or brokerage firms, to trade stocks, bonds, currencies, commodities, and other options using their funds. The objective of these trades is to drive profits for the firm.
For this, the firm uses different strategies, technologies, and expertise. However, modern platforms like OANDA Prop Trader give more control to the users (traders). These enable users with proven trade experience to borrow money from the financial institute to make trades.
If the trade makes a profit, a set percentage is split between the firm and the trader. For example, OANDA offers traders approximately 90% profit, keeping only 10%.
How Does Prop Trading Work?
Three notable aspects are integral for prop trading to work properly:
1. Capital Deployment
The trading firm will have to provide the funds (or financial support) to invest in the trades. These investments can be in stocks, bonds, derivatives, commodities, or any other available option on the platform.
2. High Risk and High Reward Approach
Traders usually adopt an aggressive approach aimed at making higher profits. That’s mainly because the trading platforms also earn from the profits. They don’t charge their clients (or users) trading fees or any other service add-ons.
3. Market-Making and Arbitrage
Often, prop traders will try to exploit price discrepancies in different markets. They might even buy or sell to provide liquidity as a market-making strategy. These are all means to capitalize on short-term opportunities.
Benefits of Proprietary Trading
Prop trading enables firms to keep all the profits they can muster. They don’t have to depend on clients to initiate trades and only earn through commissions. But while modern prop trading platforms stand to gain, so too do the users. Here are some advantages:
1. You Gain Better Funds & Profits
You can invest higher amounts once you get into prop trading on a platform. This is an excellent option for traders with suitable skills but who need more funds to make big trades. You could make big trades and reap a more significant profit margin.
2. You Can Leverage Advanced Technologies
Prop trading platforms usually operate using the latest technologies. These often include analytics, understanding algorithms, and statistical models. For better resources, an entire expert panel may be available.
3. It Incentivises the Investment Firms
Usually, when you make trades, the firms have nothing to lose. They will earn their commission whether you make a profit or loss. However, in prop trading, they only earn something when the trades are making profits. Therefore, investment firms are proactively trying to offer you the best resources available to thrive in the trading landscape.
4. Your Portfolio Diversification
Most importantly, you can conveniently diversify your portfolio. Prop trading enables you to generate multiple revenue streams. All this is possible with the help of the money that the firms provide you to make trades. You could explore forex, bonds, stocks, and other global trade options available on the platform.
How to Add Prop Trading to Your Portfolio?
Not everyone can qualify for prop trading. The proprietary trading platforms consider only a limited number of experts. Here’s how:
- First, you have to join the platform.
- You will get test or demo money that you will use.
- Once you prove your trade expertise by using that money, you will be selected as a prop trader.
Usually, different trading platforms have other services, features, or terms and conditions attached to this simple process. You may have to buy the amount. For example, invest $35 to get $5,000 to invest in the trades.
Next, ensure you make profitable or more successful trades. You will be selected for prop trading if you can prove your expertise.
Once you meet the criteria, you might start leveling up and building the trust factor with the firm. As time passes and you make more successful trades, you may leverage more money for the investment.
Maximize Your Portfolio Success With Prop Trading
Proprietary trading can be a fantastic opportunity for individuals who have the talents or skills to make big and profitable trades but lack the funds. However, these are equally risky trades that could lead to high-frequency trading. Therefore, proper risk mitigation is necessary. Self-prop trading isn’t easy to practice. It requires substantial capital and tools, so partnering with an existing and credible platform is better. Make sure to also check all the restrictions in your region before you indulge in prop trading. With these basics, you are well on your way to understanding how to leverage prop trading as a budding trader.
