Prop trading is one of the most lucrative ways to thrive in the financial world. Unlike traditional traders, prop traders use a firm’s capital to execute trades, aiming to earn profits. Consequently, funding firms retain a percentage of traders’ profit, typically ranging from 20% to 50%. A few years ago, aspiring traders would have had to physically locate a prop trading firm and pay a signup fee to get started. Now, the situation has changed. All you need is a working computer, a stable Internet connection, and sound trading knowledge. Here’s a step-by-step guide to becoming a prop trader:
Educate Yourself
To get into prop trading, you need to learn the basics of trading in detail. Evaluate the range of financial markets and assets you can trade, such as forex, stocks, commodities, crypto and indices. You also need to grasp market dynamics and price action to make informed decisions. Learn how financial news and corporate updates impact the markets. You can use free resources, such as YouTube videos, to create a solid starting plan, and then leverage paid courses and mentorship opportunities to learn winning strategies. While having a degree in finance, mathematics, or economics is a plus, you do not necessarily need one to succeed as a prop trader.
Choose a Trading Style That Suits You
Next, assess your prior experience and risk profile, and choose a trading style. Popular trading strategies include merger arbitrage, scalping, and algorithmic trading.
Merger Arbitrage: This trading strategy involves profiting from price differences that emerge before and after a merger announcement between two companies.
Scalping: It involves capturing small price fluctuations throughout the day to generate small profits.
Algorithmic Trading: This involves using automated and pre-programmed algorithms to make strategic, data-driven moves.
Assess the pros and cons of various trading strategies and determine what works best for you.
Find a Reputable Proprietary Firm
Choosing a prop firm is one of the most difficult aspects of becoming a prop trader. Prop firms provide more than just funding: They support your long-term growth and success. Look into various prop firms and compare their features, including the amount of capital they offer, whether it’s scalable, and what the profit splits are.
Select a firm that has access to diverse markets, enabling you to capitalize on more opportunities to generate profits. Prioritize firms that offer additional features, such as advanced risk management tools, analytics tools, educational resources, and mentorship programs.
Complete a Prop Challenge
Most prop firms require traders to complete a challenge before they can access the capital. Prop firm challenges are a way to screen traders and assess their skill level. To pass the challenge, you must comply with specific regulations, such as hitting profit targets (typically 8% to 10% for 30 or 60 days), and showing consistent returns. Traders must also adhere to risk limits and trading guidelines. Once you have completed a prop challenge, you will get access to funding.
Keep Polishing Your Skills
Becoming a successful prop trader requires continuous effort. Even if you have learned the technical basics of prop trading, you need to focus on additional skills to stay ahead of the competition. Master the following skills: risk analysis and management, time management, mathematical skills, decision-making under pressure, and proficiency in algorithms. Stay informed about market trends and evolving strategies to maximize profits.
Conclusion
To become a successful prop trader, you need a balance of technical skills and emotional control strategies. Learn the basics of prop trading from free and paid resources before enrolling in a prop firm challenge, which will offer both funds and mentorship. Master additional skills and keep polishing them to meet your financial goals.
