If you are interested in the Forex market and have been involved as a trader, you might feel your knowledge can be put to greater use than simply trying to make more money yourself with ever smarter trades – lucrative though that may be. You may reach a point where you are attracted to setting up your own prop firm.
Alternatively, you may not have been a trader yourself, but you have heard a bit about the concept of prop firms and want to know more – including whether it would be a good idea for you to try to set one up yourself or in partnership with someone else.
Prop Trading Before Prop Firms
The first thing to understand about prop firms is that people have only been setting them up for around a decade, but proprietary trading has been around for a lot longer, having previously been the preserve of banks and other financial institutions.
In essence, the whole business of prop trading is for a firm with capital to lend it to traders to use in making trades on the money market, to make a profit. This deal then involves the traders and the provider of capital alike each taking a cut, so everyone gains from a successful trade.
The difference now is that prop firms exist entirely for this purpose, without being involved in other financial activities in the way a bank would. This very fact highlights some key aspects of what is involved in setting up a prop firm.
Whereas a bank would devote a portion of the capital raised across a range of activities for this purpose and will continue to accrue capital this way, setting up a prop firm from scratch means you need considerable start-up capital.
This is especially true because you do not have other money-making activities to balance any losses that come from unsuccessful trades, but also because you need more than just a lot of money for others to trade with; you have to invest in creating a platform traders can work with, not least through equipping your traders with the best tech available.
Planning Your Approach
Indeed, you need a highly structured approach to your plan if you are to set up a prop firm that succeeds. Clearly, you need to have, or acquire, a strong knowledge of trading and markets before you start. You also need a clear and detailed business plan that sets out every step and shows investors and traders they can be confident about working with you.
The key legal issue is to make sure your firm is registered with the relevant regulatory authorities, with its legal structure defined and any permits or licences needed to be acquired. All this is needed before you can raise capital, although you may be in the fortunate position of having a lot of money available to start with.
Raising funds can be done by all sorts of means. You could borrow from banks, crowdfund through a large number of shareholders, or partner with a small number of high-net-worth individuals.
In the case of the latter, their level of wider involvement in the business may depend on whether they simply want to invest their wealth wisely, or have a lot of knowledge of markets and trading and want to be involved in running the business.
After this, you can hire traders. It makes sense to have some experienced traders on board with a proven track record, so you can be confident of building up your profits in the near term. But they can also be involved in training some new traders (which you can also do if you have trading experience), to build up your trader base.
Decide How To Trade
The rest is about developing a trading strategy since there are many different approaches to trading, from trying to make big gains from major events that can shake the markets to scalping, which involves building up profits through a myriad of minor gains made through the course of each day’s trading.
When your strategy is in place, you need to keep monitoring how well it is working out and where there may be areas for improvement.
All of these things are tied in with having the latest and best software. When you raise the funds, investing in this should be a top priority. The possibilities the best software creates will help you develop and expand your strategy. It should also help traders perform at their best and provide data to help analyse your performance.
By combining good planning, successful fundraising, wise trader recruitment and investment in leading software, your company could join the ranks of successful prop firms, producing healthy profits both for you and your traders.
