Proprietary forex trading is essentially trading with your own money – it can be carried out by an individual or by an organization.
It means that the entity placing trades in the market is risking their own money, whether that entity is a new trader learning to navigate the forex market or whether it’s an institution that profits from investing their own capital.
Proprietary forex traders do not have any clients; they are not managing a fund of money for anybody else, only for themselves. It is possible to be a proprietary forex trader working for a company or acting independently.
By proprietary trading, the Forex trading community typically means that you trade at a proprietary trading firm, trading the firm’s money. Here is a nice list of such firms.
Many organizations will also invest money on behalf of clients and take a percentage of the profits – in this scenario, you would not be classed as a proprietary trader – this is what investment banks do.
Trade Your Own Money
As a new forex trader, it’s important to understand the significance of mastering proprietary trading, when you should first start trading with your own money and the doors that it can open up for you.
Proprietary trading is in many respects a gateway vehicle to a successful career as a forex trader.
It serves as a mechanism to prove you can be profitable in the markets, to show you have an appetite for risk (but that you also know how to control and manage that risk) and gives you an opportunity to test how you deal with the emotional effects of trading with real money.
You should be careful too though, trading with your own money can be a dangerous game if you are not at the right stage in your trading career to risk real money and there are some critical steps you should take first before putting your own hard earned cash on the line.
In this post I’m going to teach you exactly when to start risking your own capital, I’m going to tell you the steps I think you should take and you will learn how to take advantage of the doors this can open up for you.
Prove Profitability Before Risking Real Money
This is of the utmost importance because if you stand any chance of being a profitable trader when risking real money, you first need to prove you can be a profitable trader while using ‘fake’ money.
What do I mean by fake money?
Well, there are hundreds of brokers out there on the web that offer demo accounts nowadays. These are accounts where you get all of the functionality that comes with a live trading account but with a fake balance. Typically you can download the popular trading platform MetaTrader 4 or 5, and you will get an account with 10,000 USD / GBP / EUR, etc.
You can use this account to practice implementing lots of different trading strategies. You can use it to practice risk management and everything you would do if it were a live trading account.
You should act as though it is real money. You should trade how you will trade when you have a live trading account so that you know the methods you are implementing are an exact copy of the methods you plan to implement for real in the markets.
You should use a demo account for as long as it takes to become consistently profitable with your trading strategy. By consistently profitable I mean at least 6 months of constantly making a profit and minimising drawdown. This doesn’t mean to say you have to make a profit every single month, but over the full period of 6 months you should be seeing an increase in your account balance and managing your risk effectively so you do not observe too many losing trades in a row.
A good level to aim for would be to increase your account balance by somewhere between 5 – 15% per month. This would be a good indication that you are ready to take the leap of faith into the forex market and start trading with your own money.
Trading With Real Money – Start Small, Build Up!
Once you’ve proven to yourself that you can be consistently profitable using a demo account you can start to consider trading with your own cash.
You should start off with a relatively small amount – by this I mean an amount that is small relative to your income. It’s extremely likely you will lose all of the money you put in your first live trading account – in fact I’d be amazed if you didn’t.
Having this knowledge upfront is priceless because it means you can start with an appropriate account balance and you won’t face bankruptcy when your bad trading decisions and emotional trading has destroyed your account balance. I don’t say this to scare you, nor to deter you from entering the world of forex trading. I’m telling you this because I want you to know the truth. If you know the truth, you can decide how to get started as a trader in a way that’s best suited to your financial circumstances.
Trading with real money is difficult. We are emotionally attached to money as humans, especially money we have worked extremely hard to earn. Money is the gateway to a better life for many, not necessarily a happier life, but indeed a more comfortable experience.
Everybody in the world is striving to earn more so they can improve their standards of living and provide a more fruitful future for their families.
This is perhaps why it is so difficult to be successful using real money because we start to act in very different ways to how we behave when trading with a demo account.
You should be fully prepared for the emotional rollercoaster you’re going to experience when you start proprietary trading with your own money.
You should prove to yourself that you can trade profitably with your own money with a relatively small account balance for six months before you move on to trading with more or think about managing a fund.
The idea here is to take baby steps, make sure you can handle the challenges before risking everything you have in the markets. You will only regret it if you don’t and it all goes wrong.
The markets will be around forever, make sure you are truly ready for the challenge before you embark upon this incredibly difficult journey.
Do You Want To Be A Proprietary Forex Trader?
Once you’ve spent a considerable amount of time learning how to implement your trading strategy you will be ready to ask yourself this question.
You need to prove to yourself that you’re able to make consistent profits before you even start to think about the type of trader you want to be. You should be keeping a good track record of all of your trading decisions so you can prove to people that you are a profitable trader; I call this your trading journal and have made an example that you can download if you wish.
If you decide that you do want to be a proprietary forex trader you have two options.
Firstly, you could load up your live trading account with more capital, confident in the fact that you have proven to yourself that you can trade profitably with live funds for a period of 6 months or more. You will then be able to trade much larger position sizes in the market and grow your account size considerably faster.
You should only use money you can afford to lose and should not borrow money to fund your trading. This style of trading can be the most attractive for many people, it means you’re not accountable to anybody other than yourself and your risk profile is incredibly low since you are only trading with money you can afford to lose.
The second option would be to work for a proprietary trading firm. You should find absolutely no trouble getting a job with a trading firm if you can show them 12 months of profitability with your own funds.
This is often a good way for people to earn a lot of money very fast. Prop firms have a lot of capital at their disposal, way more than you or I have and they often pay their staff bonuses that are based on the profits they make from trading. If you are currently only earning a modest income working for a proprietary trading firm might be a quicker way to earn a lot of money than trying to grow your own trading account with the limited cash you earn from your day job.
Alternatives To Proprietary Trading
You may decide that neither of these options suite you – in which case you probably don’t want to be a proprietary trader. Proprietary trading is a good way to learn and prove profitability, but what if you don’t want to work for somebody else and you want to grow your own trading account quickly?
Well, the only way to go about doing this would be by building a client base and investing money on their behalf – this is called a private fund. You could find lots of people interested in investing in forex or the stock market. Show them your profitable track record, draw up a contract where you agree commission terms and invest their money for them – taking a cut of the profits as you go along.
You should make sure you are registered with all of the necessary regulatory agencies in your jurisdiction if you’re going to do this and have proper formal agreements in place with your clients. It is by no means the easy road to success, but it can create a way of working for yourself whilst also growing a trading account very quickly.
If you deliver good results for your clients they will undoubtedly recommend you to people they know and the capital at your disposal may start to grow very fast indeed.
This is mostly what investment banks do (amongst many other things). Investment banks have large client bases for which they invest funds. The role of salespeople is to find new clients, and the role of a trader is to find lucrative investment opportunities for these funds in the financial markets.
Unfortunately there is limited scope to enter this industry in the western world since the crash of 2007-09, most large investment banks are in structural decline and a lot of industry is moving away to Asia or to hedge funds. If you do want to carry out this kind of work for an investment bank you should consider your eligibility to succeed based on your academic background.
Typically they want privately educated A* students graduating with a 1st from a top university. They want hungry eager young people willing to work 100 hours a week for essentially the same hourly rate as a shop worker or taxi driver. It is not the glamorous industry it once was, yes these people may have potentially lucrative futures but they will have to work extremely hard to achieve it – for very little in return.
A lot of sacrifice is required upfront and it’s often easier to grow your own client base and build your own investment firm nowadays than to join an investment bank.
Proprietary trading provides a great way to learn everything you need to know to become a professional trader. Every aspiring forex trader should start trading with demo funds then move to prop trading with a very small account. You should spend at least six months trading profitably with live funds before you move on to the next stage in your trading career.
Once you’ve proven to yourself that you can trade profitably with your own funds – and kept a good track record of your trades – you can start to seek out a client base or a job at a proprietary trading firm.
It’s probably not desirable to try and build your own live trading account if you’re only earning a modest income. It can take considerably longer, and you could make an excellent wage at a proprietary trading firm or hedge fund if you can prove you have been trading profitably with your own money.
Investment banking is not as glamorous as it used to be – don’t be sucked into working your butt of for one of these large bloodsuckers when there are better ways to go at it alone. Stick to your trading plan, apply rigor and discipline to your trading and keep a solid track record and you will give yourself an excellent chance of becoming a professional forex trader.