Prop trading: strengths and weaknesses of the instrument
Prop trading is quite a new tool in online trading. It appeared in the USA about 20 years ago, and later came to Europe. In Russia, it was found out about 14 years ago. Prop trading is developing, it is actively used by such famous companies as GT Capital Group, United Traders, Lite-Invest. In Russia this phenomenon became popular in 2012 after the book by Michael Bellafiore, where he described the tool and its capabilities in detail.
Prop trading is a type of investment when a market participant trades on company funds. With this option, profits are divided according to the agreement, but the standard is 50/50. Losses are compensated by the trader from his personal capital at the expense of a security deposit.
For example, a trader has a thousand dollars, which he makes on the deposit after making a deal with a prop company. Depending on the conditions, he receives on his account an additional designated amount, as a result of which he already has 2 thousand dollars for trading. Profits are divided equally, and losses are covered by the trader himself. If their amount grows up to the initial deposit amount, as in a particular case up to 1 thousand dollars, the account is blocked.
Generally speaking, prop trading can be called building a trusting relationship with a company, when the latter provides its funds, but does not risk losing them, unlike a trader.
When using this option of trading, the contract is concluded taking into account the specifics of the company, but there are the same for all points. In most cases the profit is divided by 50% to each party, but if the company needs to strengthen its position in the market, it can insist on another option. The amount that the firm allocates to the trader may exceed the security deposit twice or even 10 times.
The main advantage of prop trading is the opportunity to make a profit even for a beginner on the market. However, it is only possible to do this after a paid training course. At first, the prop company provides a novice mentor, who explains the points and monitors the trading operations.
In order to have a high profit in prop trading, you need to work steadily, and try to close transactions with minimal losses. This requires experience and ability to calculate the situation a few steps forward.
The minus of prop trading is the risk, which is present when the deposit is doubled. The lot and risks grow together with it. In case of unprofitability of the transaction, the losses will be covered from personal capital.