The landscape of trading is expansive – offering countless avenues for people to participate in the financial markets. However, the shift from a retail trader to a prop firm trader is one of transformation in both skills and mindset. In this article, we will discuss the transition aspiring traders can make from retail trading to trading in a proprietary (prop) firm. Forex trading for beginners, is a great starting point; however, understanding the subtleties of the day trading dynamic within a prop firm is essential for achieving long-term goals.
Understanding the Retail Trader Mindset
While the term retail trader encompasses millions of people, I would like to classify the group based upon skill as Retail Trader (beginner level). A retail trader is anyone who participates in the trading of an asset for their personal investment account and does it using their own money. A retail trader typically has access to the Internet and registers with a number of online brokers that service a wide range of trading assets like commodities, shares and foreign exchange. Forex trading for novices usually begins with people demoing – that is, using simulated trading accounts to practice basic strategy, charting, or technical indicator skills.
One notable feature of a retail trader is the flexibility in making trading decisions. Retail traders are essentially self-employed. This autonomy has the potential to cause emotional issues, like overtrading or overreacting to market changes. Additionally, retail traders are often subject to restrictions like limited capital resources and more stringent margin requirements, which may affect the number of trades they execute and their size.
Most retail traders work to balance the risk and reward which can lead to employment of various strategies including scalping, swing trading, or position trading. However, regardless of how hard they work, a number of retail traders face challenges on consistency and profitability over extended periods of time due to lack of discipline, proper strategy, and resource availability.
Why Proprietary Firms are Useful
Proprietary trading firms, also known as prop firms, are companies willing to provide capital to traders which allows them to use the firm’s money instead of their own. The most significant advantage of prop firms is the access to greater capital compared to what a retail trader would have. In addition, prop firms provide retail traders with a structured framework, guidance, advanced trading technology, and systems which are often unavailable.
Traders in prop firms are evaluated based on performance benchmarks achieved over a defined time period. With subsequent funding and profit-sharing access levels, their rewards further increase commensurate with success. To succeed in a prop firm environment, traders need to comprehend the nuances of retail vs. professional trading pertaining to risk management, consistency, and a sharp performance orientation.
Skill Development: Retail to Prop Trading
The journey from being a retail trader to a trader in prop firms entails a drastic transformation in both mindset and the accompanying skill set. Through a measure of luck or instinctive strategies, some retail traders find success. However, prop firms employ a strict focus on risk management, consistency, and long-term profitability. Structured day trading at a prop firm comes with a comprehensive set of rules and guidelines along with clearly defined expectations.
Risk Management.
In a prop firm, one of the critical facets of trading remains risk management. Unlike retail traders, prop traders enjoy higher levels of capital due to the greater funding that is given out when traders reach set targets. Thus, retail traders do take on greater risk in order to achieve higher returns. On the contrary, prop firms will impose strict risk parameters. Consequently, traders are expected to adhere to tight stop-loss limits and restrictions on exposure per trade. Furthermore, many prop firms will require their traders to reach specific profit targets on a daily or weekly basis while maintaining a set maximum loss threshold.
There are several things a trader needs to do to a risk management strategy before transitioning to a prop firm. This includes optimizing the use of leverage, setting stop losses, and shielding profits while lowering losses. Unlike retail trading, a more balanced approach to risk management is often the missing ingredient to a lucrative income at a prop firm, which is essential for stable income over time.
Steady Profitability
Unlike retail traders who may experience bouts of success, prop firms focus on maintaining profits over the long-term. In retail trading, one-off profits from individual trades tend to be the norm, and traders might experience a surge in a single trade, but fail to get consistent returns over time, but celebrate nonetheless. Prop firms, on the other hand, expect traders to perform consistently month over month, which is why day trading in prop firms involves tuning up strategies to ensure steady albeit small profits, rather than attempting to score big every so often.
For retail traders to adapt, they’re going to need to put in the effort to develop a detailed, systematic trading procedure that can be followed precisely. This means developing a strategy that can adjust to the dynamics of a market, while also being stable enough to yield consistent results. They should focus on cutting down on losses, even if that means the gains are not that great, but position themselves to remain profitable in the long run.
Psychology And Discipline
In the world of retail trading, the psychological challenges traders face are arguably the toughest hurdles to get over. Retail traders most often go through phases of intense and high emotion such as excitement during hot winning streaks or anger after a loss, and rather unfortunate decisions often stem from poor judgment. Conversely, prop firms require an equally high level of emotional control and discipline from their traders. A given firm will most likely follow a trader’s performance very closely and evaluate the profits that a trader is generating in relation to their decision making, emotions, and stress levels.
There are often preset policies set in prop firms regarding the scheduling and the manner in which trades are to be executed, and all of these must be followed to the letter for one to emerge successful. Decisions cannot be made on the spur of the moment. Stress cannot be exerted. Most importantly, one has to follow the plan. This degree of emotional restraint requires one to depart from the reactive nature of retail trading to a far more tempered and calculated style of trading. A person’s transition to the prop firm setting can greatly improve if they learn how to cultivate discipline and properly control emotions.
Day Trading in a Prop Firm: Tips for Beginners
Day trading in a prop trading company comes with clear benefits and disadvantages. Especially for those who are used to retail trading, they need to know what changes in this environment.
Leverage, Capital, Profits, and Losses
The provided leverage stands as the single biggest differentiating factor between prop and retail trading. Generally, positions can do more leverage from a prop firm as compared to retail brokers. Undoubtedly, this can increase both potential profits and losses. Consequently, traders need to be extra careful on their risk management. Capital available with the firm comes (increased trade sizes) but at the same time, the firm’s capital cannot be at risk on trade without considerable justification.
Profit and Loss Structure
Unlike a retail trading account where a trader pays all trading profits and bears all losses, prop traders work on a percentage profit split (e.g. 70/30) with the firm. That means they keep 70% of the profit they generate while the remaining 30% goes to the firm. Each trader is responsible for achieving their own profitability which directly impacts their earnings. It is given that every prop firm works based on performance. As a result, the firm cares about how well the trader is able to control risk, follow rules, and make money in the long haul. It is evident that profit-maximizing behavior will lead to value destruction and drastic losses for many prop shops and this is not an acceptable outcome for such firms.
Trading Plan and Strategy
For retail traders, the process of strategy development is usually personal. It’s based on individual experiences and trial-and-error. This is true for a fraction of traders only, as most prop firms have some or basic rules that all traders have to adhere to. These rules tend to have a specific set of guidelines to be followed for each position that is opened. Such rules are a function of the firm’s risk and reward with an established model that has worked in the past. Retail traders need to adapt if they wish to get employed as these firms have a standardized way to control the overall risk to the firm.
Feedback and Mentorship
Provided that we have a prop firm, we are able to gather unfathomable help in the form of mentorship and feedback which may be unavailable in any other scenario. Prop firms offer a plethora of resources, ranging from training to even market analysis and one-on-one mentorship, which all help in the overall man improvement. In the retail setting, traders work autonomously, which fully cuts them off from such resources. Guidance has the ability to refine a traders market perception to competitively perform on multiple levels.
The Path to Becoming a Prop Trader
Prop trading is something you cannot shift to from retail trading in a single moment. A trader must focus, be open to shifting their mindset towards absorbing new information and remain dedicated to the work itself. For someone completely new to the forex market, these qualities will allow them to step into prop trading, otherwise claiming to be a professional around other prop firms is rare. Knowing the basics, having a robust foundation, flawless risk management skills, and developing self-discipline will lay the groundwork for these individuals’ careers.
This transition solely depends on one’s mental state and the refinements needed. By controlling their emotions, setting smart strategies, and aligning their mindset with the firm’s standards, a trader will find themselves shifting to the other side of the ‘gate’ into an absolutely professional environment. Investing time here will unveil to them what trading with a professional firm truly means. With time, a trader will be able to claim rewards beyond their imagination.