The idea of Prop Trading as a profession is based on the concept that professional prop traders are allowed leverage beyond the 4:1 retail day trader limit. That is great when used on a truly professional level. If banks can leverage deposited funds in the area of 30:1, why shouldn’t a professional prop trading firm and prop trader be able to take similar risk?
However, the idea of prop trading has grown from its roots of professional traders using the prop firm’s leveraged funds. It is now about “retail prop firms” being used to side-step the Pattern Day Trader Rule that requires a minimum of $25,000 dollars to day trade actively.
This has led to under-capitalized individuals being able to gain even higher leverage than 4:1 with their under-capitalized funds.
Win-Win or No-Win
For the majority, this is a no-win situation that ends in all their limited funds being lost. Big boys and girls should do their own due diligence. Most don’t, so here is how retail prop trading works. It goes from a less-than advantageous situation for the under-capitalized trader at best, to an outright scam.
What I have called the “retail prop firm” is about selling you a course or courses under the guise of preparing you to be a prop trader. They are not making anything significant from the small trader profits – if there are any. The real business is the courses and the trading commissions.
Regardless of a course taken at the retail prop trading firm, FINRA requires taking the Series 57 test to become a licensed prop trader. The cost is $120. That test has nothing to do with the courses sold at the prop trading firm.
If you past the Series 57 test, FINRA then considers you a legal prop trader. Based on passing the 125-question test, FINRA considers you to now know enough about the markets to use additional leverage.
Nothing could be further from the truth. However, you can now take on the additional risk of higher leverage as a licensed prop trader.
The retail prop trading firm can now give you the legal privilege to put your highly leveraged money at risk.
Can You Trade With Real Money
Since it is your money at risk, these retail prop firms will allow you to trade your real-money whenever you want. You put up risk capital and those funds will be held for one year. You always pay for the platform and real-time data feed.
While the prop broker-dealer has limited risk (its money) in the case of a large gap against your position or a fast news market that wipes out all of your risk capital – and some of theirs. They will be telling you that you have to pay their money back to them, so all the risk is yours.
The typical retail prop trader today is trading with scared money and doesn't get far before losing their limited funds. They do generate some commissions for the broker-dealer, which the broker-dealer is okay with of course.
Between commissions, software fees — and there will be losses — it will not take long before the limited funds shrink away. Once your money has run low, you have to add more money to the prop trading account or the prop firm closes the account. The retail prop firm is not going to let you lose their money.
If you have profits, some will be taken by the prop firm (comes with the privilege) and you can take your percentage of those profits out of the prop trading account.
The retail prop trading firm's main business is not taking risk to make money for trading profits. That is what real prop firms do. Profits to the retail prop firm is a bonus – if it happens, since they do take part of your profits. The retail prop firm is in the business of selling a course and getting paid commissions.
In any event, it's an open and legal business relationship between the prop trading broker-dealer and the trader. Know what you're getting into.
The Prop Trading Scam
BEWARE that there is a special breed of firm out there. This is not a licensed broker dealer or a firm at all, but makes claims of funding traders with real-money. That begs the question, is there something other than real-money?
However, funding does not happen with real-money until the trader can prove s/he can make money on a trading simulator or what is called “Paper-Trading”. That does sound reasonable, right?
Here is where the scheme/scam gets interesting, but not so for the naive wannabe trader.
As the trader incurs “Paper Losses” – with the Fake-Money on the trading simulator (and those Paper Loses increase beyond what can be overcome), the vision, which is the carrot being held out of getting to trade the firm's “Real Money” trading account, begins to fade away.
The scam is actually setup for this to happen and is planned for by design in an advancement table that keeps the “fish on the hook.” There never was an intention to fund the trader with a real-money account. The plan is to sell the dream of a being a prop trader with a funded real-money trading account and make millions!
The scam is built on getting the victim paying for courses, other fees, keep-em paper-trading and paying more again!
The Prop Trading Funded Account Dream Fades
As the dream fades, the so-called prop trader (most never take the 57 test) is offered a way out to pay for their paper-trading loss dilemma. You read it right, pay for the paper losses!
For a Fee – that will be billed as a class – the “Paper Losses” are erased and the Paper Trading Account is replenished with new Fake Cash.
The cost of the new fake-cash is billed as a course to cover up the trail of this scam.
The cost for the victim to clear the paper loses and replenish the paper-account with fake cash is $1000.00 to $1500.00 dollars of their “real-money” to the scammer.
The victim that told me about the scam did it. Why? The dream of the funding of an account and making millions
The dream – the goal of becoming a professional trader with a funded real-money trading account is a powerful one. The scammer takes full advantage of it – that is what scammers do. Sell a dream.
It is NOT a normal practice to charge for paper-trading losses. If you have been a victim of this scam tell others, pass on this article so they are not drawn into following the same path.
There are a lot of marketers out there to sell you their Holy Grail system or indicators. Don’t fall for it and avoid prop trading if you have limited funds.
Can You Trade With Leverage Without a Test
Anyone can trade futures and currencies (that are highly leveraged) without taking a test. The Pattern Day Trader Rule should be abolished. It does not stop anyone from day-trading that wants to. It only raises the bar to do it, but only for stocks, which makes no sense. And it has opened the door for scammers.
Self-directed Investing and trading in the markets should be viewed as a profession, especially with a leverage. As with any profession, education is required.
The first thing to do is to learn the foundation of information about the markets and how to effectively use technical analysis.
You can do that by signing up for this COURSE on exactly that.
I hope you have benefited from this overview of prop trading.
All the best,