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. What makes them professional?
If banks can leverage deposited funds in the area of 30:1, why shouldn’t a professional prop trading firm and the prop trader be able to take the similar risk? They should.
However, the idea of prop trading has mutated from its roots of professional traders using “the prop firm’s leveraged funds.”
It is now about “retail prop firms” primarily focusing on under-capitalized individuals wanting to get around the Pattern Day Trader Rule (PDT). The rule requires a minimum of $25,000 dollars to day-trade actively.
This has led to under-capitalized individuals able to day trade actively and gain leverage higher than 4:1 with their under-capitalized funds.
Years ago, anyone could day trade with 2:1 leverage and I think that they still should be able to.
There should not be a PDT rule at all, but regulators want to protect you from yourself when trading stocks, but only stocks.
There is a better way to grow a small account, but is there a way to Really do it with Other Peoples' Money? There is.
Quit Your Job to Trade for a Living as a Prop Trader, Win-Win or No-Win
For the majority, this is a No-Win situation that ends in all of their limited funds being lost.
It goes from a less-than-advantageous situation for the under-capitalized trader at best, to an outright scam.
The “retail prop firm” is about selling you a course or courses under the guise of preparing you to be a professional prop trader.
Some of these firms buy courses from others or have other presenters teach whatever it is that they want to teach as a method.
The business is based on “Counselors” selling the courses for a commission and the firm collecting the trading commissions.
Pass The Test and You're a Prop Trader
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. A small amount, but the test is not easy and requires a fair amount of study-time.
Some retail prop firms will sell you a course to help you can pass the FINRA test. A win-win for the firm.
If you pass the 125 question Series 57 test, FINRA then considers you a legal prop trader. You now know enough about the markets — according to FINRA — to use leverage.
Nothing could be further from the truth. However, you can now legally take on the risk of higher leverage as a prop trader.
The retail prop trading firm can now give you the legal privilege to put your highly leveraged money at risk.
Most Have No Idea About It
Once you have passed the prop trading test — you are licensed.
As a licensed person, your financial dealings now must be reported to the broker-dealer.
Those financials are any and all that are in — and outside of the stock market. This goes into your file.
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 pay for the trading platform and real-time data feed. Typically, $50 to $250/month
While the prop broker-dealer has a limited risk (its money) in the case of a fast market that wipes out all of your risk capital – and some of theirs.
They will want their money back from you, so all the risk is yours.
The retail prop firm is leveraging yours and their money, so all the funds moving back and forth are based on a legal obligation to make good on any losses.
The Advancement Table
The advancement table is shown from the perspective of how you can move from paper-trading to a “Master Trader” level of trading a multi-million dollar account. The table really meant to keep in check from risking too much of your money, so you don't put their money at risk.
However, the prop firm will allow you to “Buy Up” to a higher level by putting up more of your money at risk.
No business is in business to lose money and neither is the prop firm. But real prop firms risk their money and keep you in check from losing their money by force money management guidelines and technology that will stop the bleed if it gets too far.
What Happens to the Majority
The typical retail prop trader today is trading with scared money and doesn't get far before losing their limited funds.
They do generate commissions for the broker-dealer during that time, 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 will have to add more money to the prop trading account (it will be held for a year) or the prop firm closes your account.
If you want to quit and have funds left, you have to wait the one-year period to get those funds back.
Real Prop Firms Put Up Risk Capital
The retail prop firm is not going to let you lose their money. Real prop firms risk the firm's capital.
Of course, if you lose too much of their money – you're fired. Same as any profession.
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 a risk to make money for trading profits. That is what real prop firms do.
The marketing of quitting your job and trading for a living sound attractive and can be done; however…
There is a Better Way
There is a much better way than these so-called retail prop firms that require testing and your money being at risk.
You making Trading Profits — to the retail prop firm — that is a bonus since they don't expect it.
The retail prop firm is in the business of selling a course, charging fees and getting paid commissions.
In any event, it's an open and legal business relationship between the prop trading broker-dealer and the trader.
Now you have a good idea of what you're getting into.
If you are willing to trade other instruments than stocks, you do not need to take a test to be licensed and Can trade other peoples' money.
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 I fund traders with real-money.
That begs the question, is there something other than real-money? Seems that there is.
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?
After paying for your course, you have monthly fees. You pay for the privilege of using the paper-trading platform.
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, 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 set up for this to happen and is planned for by design in an advancement table that keeps the “fish on the hook.”
Was there ever an intention to fund the trader with a real-money account or is it a scam?
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 – you – paying for courses, other fees, keep-em paper-trading and paying again!
The scammer takes no risk at all, of course.
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 a real account and assurance of 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. This scam has moved to Latin-America as well.
Can You Day-Trade With Leverage Without a Test?
Anyone can trade futures and currencies (that are leveraged) without taking a test. These are the instruments to consider trading.
They trade with the same price patterns / technical analysis as stocks.
I have students trading a funded account by Topstep Trader.
One student text me the other day
left about 10 grand on the table (lol!) but still super stoked and grateful!”
The Pattern Day Trader Rule should be abolished. It does not stop anyone from day-trading stocks that want 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 leverage. As with any profession, education is required.
The first thing to do is to learn the foundational information about the markets and how to effectively use technical analysis.
I hope you have benefited from this overview of prop trading.
All the best,
Managing Director of Master Trader
Trading the Pristine Method — Origin and End