Last month  @tradernickfx and @austinsilverfx and I discussed the enormously popular retail prop trading industry.  Should you audition for one of these firms? That’s subject for another column, but today I want to deconstruct the five key factors that will help you choose wisely if you do go down that path.

Over the past few years retail prop firms have blown up in popularity taking over the margin trading industry by offering traders every enticement imaginable to audition for a chance to “trade their money”. Of course there are more than a few scammers in the mix, but there are also many well established firms that have been paying out profits on a monthly basis for years. So assuming you are working with a legitimate firm - what are some of the factors that you need to consider?

Time limit versus no time limit offers

The easiest way for me to make you fail a trading audition is to put a time limit on your performance. That’s why so many prop firms make it the very first condition of their audition process. Putting a time limit not only forces the trader to gear up higher than is prudent in order to generate return, but will also force the trader to enter the market simply because he needs to beat the performance deadline rather than because the setup is there.  So no time limit firms are clearly better because they allow the trader to trade at their own pace.

The ability to hold positions over the weekend

If you are a swing trader the ability to hold trades over the weekend is a key benefit to seek. Unfortunately very few prop firms offer such terms because of the highly volatile nature  of the financial markets. No one wants to be exposed to gap risk especially in any highly levered position. This is not a deal killer as   a swing trader can simply re-establish the position Sunday night but should the gap move go your way those profits would be lost.

Reasonable Risk Reward terms

Most prop firm auditions require a 10% return with no greater than 5% drawdown. That’s a reasonable structure that basically asks you to generate 2 units of profit for 1 unit of risk. Anything tighter than that is unrealistic and really skews the odds of success against the trader. 10% up against 5% down is hard enough - don’t accept anything harder.

Wide variety of instruments

There are basically four primary instruments that are traded in the retail prop space - FX, equity indices such as Nasdaq, Dax, and Dow Jones, commodities such as metals and oil and crypto. Most of the firms will offer you at least 3 out of the 4 major markets. But some will restrain you to only one. If you are a specialist in that one market that may be fine, but for traders who want to seek opportunities far and wide - variety is not only the spice of life but is also the necessity for profit.

Favorable Spreads

This frankly took me by surprise as I assumed that in our highly integrated, highly competitive global markets spreads have basically been whittled down to 1 or 2 points. That’s usually the case, but not always and any prop firms that charge 3 or 4 points spreads on anything but the most volatile FX pairs or crypto are essentially setting you up for failure. Trading, especially day trading is a game of millimeters and a 2 point spread versus a 4 point spread could mean a difference between a 40 point win and a 40 point loss. Do that a few times during your audition process and you won't last a month before blowing out. 

Last but certainly not least is the need to take the money and run. Always cash your profits with the prop firm and never leave them with the “house”. Tempting as it may be to build up your account for a larger stake, the events of the past week teach us that a bird in hand is always worth two in the bush. 

Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.

Education feed Join Telegram

Editors’ Picks

EUR/USD clings to modest gains above 1.0500

EUR/USD clings to modest gains above 1.0500

EUR/USD clings to modest daily gains above 1.0500 heading into the American session as the US Dollar struggles to find demand following Monday's rally. The modest improvement in market mood seems to be helping the pair edge higher amid a lack of high-tier data releases.

EUR/USD News

GBP/USD gains traction, climbs toward 1.2250

GBP/USD gains traction, climbs toward 1.2250

GBP/USD gathered bullish momentum and advanced toward 1.2250 during the European trading hours on Tuesday. The positive shift witnessed in risk sentiment makes it difficult for the US Dollar to preserve its strength, helping the pair stretch higher.

GBPUSD News

USD/JPY retreats from three-day top, downside seems limited amid modest USD strength

USD/JPY retreats from three-day top, downside seems limited amid modest USD strength

The USD/JPY pair struggles to capitalize on its modest intraday gains and attracts some sellers in the vicinity of mid-137.00s, or a three-day high touched this Tuesday.

USDJPY News

Editors’ Picks

EUR/USD clings to modest gains above 1.0500

EUR/USD clings to modest gains above 1.0500

EUR/USD clings to modest daily gains above 1.0500 heading into the American session as the US Dollar struggles to find demand following Monday's rally. The modest improvement in market mood seems to be helping the pair edge higher amid a lack of high-tier data releases.

EUR/USD News

GBP/USD gains traction, climbs toward 1.2250

GBP/USD gains traction, climbs toward 1.2250

GBP/USD gathered bullish momentum and advanced toward 1.2250 during the European trading hours on Tuesday. The positive shift witnessed in risk sentiment makes it difficult for the US Dollar to preserve its strength, helping the pair stretch higher.

GBPUSD News

Gold advances to $1,780 as US yieds edge lower

Gold advances to $1,780 as US yieds edge lower

Gold price gained traction and climbed to the $1,780 area on Tuesday. Following Monday's 2.5% increase, the benchmark 10-year US Treasury bond yield is down nearly 1% on the day at around 3.55%, fueling XAU/USD's rebound.

Gold News

Jim Cramer urges investors to sell crypto holdings, says XRP, Cardano, Dogecoin and MATIC could go to $0

Jim Cramer urges investors to sell crypto holdings, says XRP, Cardano, Dogecoin and MATIC could go to $0

Jim Cramer is an American TV personality and host of the Mad Money show on CNBC. Cramer urged investors on December 5 to sell their crypto holdings before it is too late. 

Read more

Preparation week ahead of Fed, ECB, BoE

Preparation week ahead of Fed, ECB, BoE

This week will prepare markets for the last key events of the year: policy meetings by the Fed, ECB and BoE on 14-15 December. It looks like the dollar's long positioning has now completely faded.

Read more

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology