If there was a single word to describe a proprietary trading firm, that one word would be “freedom”.
Unlike retail or institutional trading, where traders buy and sell on behalf of either individual accounts or accounts managed by a larger institution, organisation or pension fund respectively, prop funds allow ambitious, skilled and inventive traders to be in complete control of their portfolio and strategy.
This allows them to be more agile, take advantage of volatility in the market, adopt risk management strategies and advanced trading software as they see fit and potentially make a lot of money.
With that said, by definition, a prop firm assumes all of the risks by trading with their own capital, so before opting to get into the prop firm business, here are some reasons why you should, and why you might also want to think twice.
Why You Should Start A Prop Firm
Are you a trader, investor or investment firm that has already seen success on the market whilst working for someone else, but felt restrained by the inherent limitations of not being in complete control of your trading capital?
If so, then a prop firm is a perfect choice, as it allows you to use not only your own expertise as a trader but also work with many other talented traders who have talents proven through real-world experience and evaluation tools.
It also lets you move beyond a few markets and lets you experiment with all kinds of strategies and markets with the help of traders, mentors and peers. This lets you forge your own strategies, identity as a trading firm and a culture that permeates through all of its aspects.
It also has the potential for significant profits, both in the short term through savvy trades but also through forging a reputation for success that in financial markets leads to a lot of potential for expansion.
If a prop firm gets big enough and works with enough capital, it can start to shape the market as well through major trades.
Why You Should Think Twice
There are a few reasons why one should carefully consider starting a prop trading firm, but there is one particular reason that is bigger than every other. This reason is a consequence of the very freedom that prop firms are built on.
Being free to set trading strategies and make considerable profits is offset by the freedom to make trading decisions that could potentially cause huge losses as well. Unlike other forms of trading, where this money would come from a customer or client account, the company itself will be liable for these losses.
This can of course be offset by setting up a talented team, implementing strong risk management strategies and using simulation software to test your strategies against the market, but this is important to consider.
As well as this, prop trading is a competitive field, so you will need to be competitive in order to get the best traders on your side and build up strong, successful portfolios.
