Prop Trading: How Does It Work in Market Liquidity? (2024)

​Prop trading is the abbreviation of proprietary trading, in other words, trading on your own account. So far no problem. I’m a trader on my own account and that’s it, end of story.

The small peculiarity of prop trading firms is that they generally offer beginner traders the opportunity to trade on demo accounts and then pay them real money if they make a profit. Yes, yes, that’s right. I wanted to know more.

What does a trading prop firm offer?

A prop firm trading will offer you the opportunity to become a prop firm trader with them. Basically, they suggest that you are going to work for them. For them? Here it is not clear but it is a question of a contract. To become a prop firm trader you must register to take a test. A paid test of course. Depending on the size of the virtual wallet that you are going to trade, you will pay more…

I looked at three prop trading sites and overall it’s still the same selection process. You pay to do a trading test for the first month. Then you must repeat a second test period. If the second period is validated, you will be refunded the initial payment (for some).

You are a “prop firm trader” so you access a virtual portfolio with a size corresponding to your registration formula. From what I could see, it goes from $10,000 to $400,000, for a 10K account the test costs $150 for the $200,000 account it’s $450 to give you an order idea. They say that you trade with your virtual trading account and that they replicate your orders in their algorithms etc etc.

The prop firm trader keeps 80% of the profits following an 80/20 split. Obviously real money.

The test to be a prop firm trader

So basically you are going to apply for a trading position but you have to pay for your test. We don’t pay to work but the opposite. The criteria to be respected to carry out the test are still drastic. You must trade a minimum of +-10 days in the month. The minimum profit required is on average 10% to pass the test. There is a maximum daily loss as well as a maximum cumulative drawdown over the month. If at any point during your test period you do not meet one of the criteria mentioned, your test is failed and you must pay again to repeat one… Confused? I suggest you to take this prop firm challenge!

But what is the status of the prop trader? Well, this is where I have trouble putting it into a category. If we ignore the fact that the trader pays to take his test, is he considered an employee? Obviously not because there is no fixed salary. Is he considered an independent person who provides a service? Why not, but you still have to be incorporated…

Whether an employee or a service provider, does he have the right to trade money on behalf of others? The answer is no if it does not have any approval. At the same time, he trades on a demo account! But he will receive real money if everything goes well! If he receives real money from financial transactions, trading taxation applies.

The positive side of prop trading?

Trading a demo account, therefore with virtual money, still removes some pressure from trading. If we ignore all the “strange” points mentioned above, the fact of working a demo account but earning real money in the event of a profit remains very attractive on paper.

What is the business model of prop trading?

Very simple and I think you guessed it. Knowing that the share of losers in trading is around 80% (depending on different sources) trading prop firms make money with the multitude of tests that beginner traders will pay for. What you need to know is that if you manage to take the test and be “qualified” and a winner for one month, it is possible to lose the benefit of the test the following month and have to pay again to take one.

Conclusion on prop trading

Let’s be honest intellectually, who is going to entrust a stranger with a trading portfolio of 200 or 400 thousand dollars? or else pay him in real money on the basis of such a large trading account??Please be aware that some prop firms have “their” traders work on real accounts after the testing phase, but these are accounts with enormous leverage.

You think you have a lot of capital, well no, plus with the very drastic criteria they don’t risk much, as soon as you don’t respect a criterion the account is closed and you have to pay again for a test period. Are you still interested? At least you should choose the best prop trading firm!