Why Become A Prop Trader

May 11, 2020

This weekend when I started writing todays email, I was going DEEP on things like why trading USDCAD using the FVBO setup in sideways neutral and sideways volatile regime with 4.6% risk and in fact why only trading sideways neutral/volatile with much higher risk might be a better strategy than trading any other. 

All insights that we are revealing in the Trading Lab. We are digging deeper and learning more and more with each day.

And then I checked my DM's...I don't check them all that often, especially from people I don't know, but today I did. It seems that I'm the guy that everyone is asking about how to get into prop trading. Actually, people have convinced themselves that they can't get into prop trading for one reason or another, so I decided to share some of their questions. 

What is prop trading?

Prop trading is simply trading firm capital (and your own right along with it).

Who can become a prop trader?

As far as I know any adult human, from most any country, with any education (or lack of like me), using a Mac, PC or Linux, left handed or right handed, can swim or can't swim, in summary anyone! 

What benefits are there to prop trading?

If you were trading a $100,000 account currently (or $10,000 or $2,000 or whatever amount), and you make 10% this month you earned $10,000! Pretty amazing!

If you were trading a $100,000 account and were prop trading, the prop firm would match your $100,000 so you'd be trading a $200,000 account. With the same 10% profitability you would have made $20,000 for the month, doing EXACTLY THE SAME THING. 

As a beginner with the firm, they would share in the profits with you at a 70%/30% split in your favor. 

  • You would take $14,000 of the profits (vs $10k on your own
  • The firm would take $6,000 of the profits +$200 desk fee
  • All in that would be $13,800 of profit or an additional 38%

Keep in mind, you did NOTHING DIFFERENT. You still made the same 10% you would've made if you didn't have a prop account, but if you did trade with a prop account you made $13,800 vs $10,000

You didn't have to attend any meetings, you didn't have to submit a report, you didn't have to do anything else than you normally would do as a trader, you simply get more capital. 

How to grow in prop trading

Consistency is the name of the game in prop trading. That means consistently low risk management and deployment of your capital.

As you perform the firm is incentivized to put more capital to work with you., and they are incentivized to keep you trading their money. 

After a year or so of consistent returns, the trader/firm split usually changes in the traders favor of 75/25 or even 80/20 split

Given that same example above with an 80/20 split, you would've taken home $15,800 on a 10% month vs $13,800.

If you are generating consistent returns (low risk) they will put more capital to work with you. Typically there is a requirement by the firm for you to be above your "high water mark", that is the highest closing price for a month, for two consecutive months. 

There is a very good possibility that within the first year you could be trading $150-200k of firm capital in addition to yours. 

With your $100k and the firm matching and increasing your capital let's say you had $200k of firm capital, you'd now be trading a $300,000 account. With the same 10% monthly profit that's $30,000 and at 80/20 split you'd have $25,800 (26k plus desk fees) of profits, and you've only committed $100,000 of your own capital.

That's a 25.8% monthly return with a prop account vs 10% return if you did it without prop. 

If you are so good, why not start a hedge fund vs trading prop?

Hedge funds are great ways to lever up as well, however the incentives are far inferior to prop trading. If you trade successfully, earning money every month, you are penalized to run a hedge fund vs trading prop. 

Even with the traditional 2/20 incentive structure where the manager would receive 2% of all assets under management per year and 20% of performance, per year. 

On a $5 Million dollar fund that performs at 50% annual returns, it would look like this

  • Management Fee $25,000
  • Profit $2.5 Million dollars, manager receives 20% or $500,000 Dollars
  • Total $525,000

On a $5 Million prop account that performs at 50% annual returns (with 80/20 split in traders favor), it would look like this

  • Management fee = $0
  • Profit $2,500,000 (manager receives 80% or $2 Million Dollars
  • Total $2,000,000

Basically the same returns but far less work, as the hedge fund has a multitude of job requirements such as:

  • Fund Raising
  • Legal, Accounting, Compliance, Taxes
  • Customer Retention and Reporting
  • Paying rent
  • Human resources, recruiting/hiring/firing
  • Etc…

Where as the job requirement for a prop traders is:

  • Make money


"Can I trade the FVBO/VBO strategy as a prop trader or do I have to create my own?"

  • Yes, you can trade any strategy, the important part is that you are profitable.

"What if I don't have 100k account to start with, I only have $5k would they accept me?" 

  • Yes

"I don't live in the United States, can I still join?"

  • Yes, you just need to be a human

"I run algo's can I trade them?"

  • Yes 

"I don't daytrade, can I still trade prop?"

  • Yes

"I daytrade, can I still trade prop?"

  • Yes

"You talk about trading FX, but can I trade other instruments?"

  • Yes

"Can I trade as a corporate entity?"

  • Yes

"Can i trade it with other investors as a partnership?"

  • Yes

Bottom line, if you know how to trade and are profitable I can't think of a reason why I wouldn't join a prop trading firm. 

Here's a link to join the FX program

And here's a link to join the Options program

If anything reach out to them and see how you can work with them.

Disclosure: I am a mentor there so you will be able to work with me before you go live trading live funds.


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