prop firm trading

Prop Firm Trading | All You Need to Know

Prop firm trading is a type of financial service company that provides traders with capital to trade in return for a percentage of the profits generated by the trader. There are different types of prop firm trading with their unique characteristics. There are different functions and benefits of prop firm trading as well as the disadvantages and all these are discussed in this article.

What is Prop Firm Trading?

Prop firm trading otherwise known as proprietary trading is a company that provides its traders with capital to trade, in return for a percentage of the profits generated by the trader. A prop firm engages in the trading of stocks, bonds, commodities, currencies, or other financial instruments. These traders often use the firm’s capital to make their trades and are typically given a certain amount of freedom to choose their trading strategies.

In addition, they may provide traders with access to advanced trading information, software, and tools, as well as mentorship, instruction, and support from professional traders. When trading, traders are typically required to abide by a set of rules and guidelines established by these firms. 

Types of Prop Trading Firms  

There are several types of prop trading firms and each of these prop firms has unique characteristics that make up their existence

Funded Trading Accounts 

These prop trading firms provide traders with funded accounts to trade with. Although traders are paid a portion of the profits they make, they are not employees of the company. Traders who wish to trade independently but lack the finances to do so frequently use funded trading accounts.

These accounts provide traders with a certain amount of capital to trade with, but they also come with certain rules and regulations that the trader must work with. If these targets are not met, the trader may lose access to the account. In addition, Funded trading accounts can be a great way for traders to gain experience 

Prop Shops 

Prop Shops, or proprietary trading shops, are a newer type of prop firm trading. These firms typically have a more decentralized structure, with traders working remotely from their own homes or offices. They often have a more flexible approach to risk management and may allow traders to take on more risk in exchange for a higher percentage of the profits. Prop shops tend to be smaller and more agile, they often focus on specific markets or trading strategies.

Bank Prop Trading Desk

Bank prop trading desks are trading desks that are owned by a bank or financial institution. These desks are used to trade for the bank’s account, and they often focus on specific markets or trading strategies. A bank prop trading desk might focus on foreign exchange trading, or it might focus on arbitrage trading strategies.

Bank prop trading desks are often well-funded and have access to advanced technology and research resources. They can be large and complex, with multiple teams of traders working on different strategies. They require high experience and qualifications.

Market-Making Firms 

Market-making firms, or MMs, are a specific type of proprietary trading firm that provides liquidity to the markets. MMs constantly buy and sell securities, providing a bid and ask price for those securities. This helps to keep the markets efficient and allows other traders to easily execute their trades. Market-making firms are typically large and well-capitalized, and they often work with other proprietary trading firms and brokers. They also use sophisticated technology and algorithms to help them manage risk and make quick decisions.

Functions of Prop Firm Trading 

There are different functions of prop firm trading, and they are listed below: 

Capital Provision 

Prop firms usually have a capital pool from which they finance the positions of their traders. This capital may come from the firm’s funds it may be borrowed from banks or other financial institutions. The firm’s traders are then responsible for generating profits from this capital, and the firm keeps a percentage of the profits as compensation for providing the capital. Capital provision by prop firms can give traders the financial backing they need to trade and make a profit. 

Risk Management 

A group of risk managers are available in a  prop firm and their job is to ensure that the traders there work according to the firm’s risk guidelines. This involves monitoring and keeping an eye on the traders, ensuring that appropriate risk management strategies are being used, and recognizing and addressing any possible risks. In addition, risk managers might be in charge of establishing and overseeing stop-loss orders and other instruments for reducing risk.

Technology Provisions

Prop firms generally provide their traders access to various technological tools that facilitate trade execution.  These include Trading platforms, order management programs, market data feeds, and other resources. Prop firms occasionally even create their exclusive technologies to provide an advantage to their traders. With these technology tools, traders may manage their positions, execute transactions fast and effectively, and stay up to date on market circumstances.

Research and Educational Materials 

For those considering prop firm trading, it is important to know that Prop firms make their research and education materials available for traders, it could be through online portals or platforms that their traders can access.  These traders can log in and access these materials, or it may be a part of the trading platform itself. Some firms may also send out research reports or other materials by email, or post them on social media. The goal is to make the materials easily accessible and convenient for the traders to use.


In prop firm trading, mentorship involves pairing experienced traders with newer, less experienced traders. The experienced traders act as mentors, providing guidance and advice to the newer traders. This can include sharing their trading strategies, reviewing the new traders’ performance, and helping them improve their skills. Mentorship can happen in person or online and may be offered as part of the prop firm’s program or as an optional service.

There are different types of mentorship available in prop firm trading, it includes; one-on-one mentorship, group mentorship, and remote mentorship. In one-on-one mentorship, the experienced trader works directly with the newer trader, providing individualized guidance and feedback. This is typically done in person, but can also happen online. In group mentorship, the experienced trader works with a group of newer traders, providing general advice and guidance.

Remote mentorship is similar to group mentorship, but it happens entirely online. This can be done through video conferencing, message boards, or other online platforms. It’s a convenient option for traders who may not be able to meet in person or who are located in different parts of the world.

Advantages of Prop Firm Trading

There are different advantages of prop firm trading and they are listed below;

  • Stockpile inventory of securities: Through prop trading, a company can accumulate shares and securities, these inventories may be sold to clients When the market gets illiquid or when it becomes more difficult to buy or sell securities on the open market. 
  • Offers for prop trading large stock lists for short sales: Finding shares is essential for successfully selling short, and prop trading firms help you with this. You may find it difficult to find shares and sell short as a retail client. Certain stocks can be off-limits to short sales because they are on the threshold. 
  • Proprietary trading firms provide risk reduction: Prop trading can be a good option even if you have a large financial account. You can invest the remainder of your money in stocks for growth, using a small deposit you can afford to lose. 
  • Higher profits: prop trading allows institutions to make more money Compared to operating as a broker and just getting commissions. 
  • Multiple trading platform: One of the major advantages of a Prop trading firm is the option to select from a variety of platforms. This is a major advantage to retail traders who are typically restricted to the offers of the retail firm. 

Disadvantages of Prop Firm Trading 

There are several disadvantages of prop firm trading and they are listed below;

  • Lack of job security: Prop traders working for a prop firm are at risk of job termination if they fail to meet performance standards, and there is often no guarantee of employment for a certain period. 
  • Competitions: Prop trading firms may be difficult to get into, There is often a lot of competition for prop trading jobs, and many firms require a degree in finance or economics, as well as high experience in the industry. This can make it difficult for new traders to break into the prop firm trading industry.
  • Conflicts of interest: Prop trading firms are often owned by large banks or financial institutions, which may have an interest in the securities that are being traded. This can lead to potential conflicts of interest, which can be difficult to manage.
  • High prop trading fees: The majority of prop trading companies charge for the software you use, particularly if you trade remotely. The prop trading fees may seem exorbitant in comparison to what retail consumers pay.
  • Unpredictable bonuses in prop trading: Prop firm traders are often paid a portion of their earnings as bonuses, which can be unpredictable and may not be guaranteed. This can make it hard for prop traders to budget and plan for the future.

Frequently Asked Questions

How do you become a prop trader?

There are a few different paths that can lead to becoming a prop trader. Some common paths include:

  • Applying to prop trading companies requesting a funded account 
  • Knowing how to trade
  • Completing a prop trading training program.
  •  Having prior experience in the financial markets.

Are prop firms legit?

Yes. A trader’s services are legitimate if they can pass an evaluation, pay the required fees, obtain a funded account, and obtain access to a prop firm’s capital. it is also important to do your research and make sure that you’re working with a reputable prop firm.

What are the risks of trading with a prop firm?

Prop traders may be terminated if they fail to meet performance standards, and there is often no guarantee of employment for a certain period. There are competitions and there may be conflicts of interest.

What do prop firms do? 

A prop firm is a company that provides its traders with capital to trade, in return for a percentage of the profits generated by the trader. A prop firm engages in the trading of stocks, bonds, commodities, currencies, or other financial instruments. 

What is the application process for joining a prop firm 

The application process for joining a prop firm can vary depending on the firm, but there are some common steps that you can expect. The first step is usually to submit an application, which may include your resume, cover letter, and other relevant information. The next step is often an interview, some firms may also require you to take a trading test, which assesses your ability to make sound trading decisions. If you’re offered a position, you’ll likely need to complete training and onboarding.

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