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Trading is usually a solo activity. But with the advancements in the world, the trading world has brought another option to the table – proprietary firms, or prop firms. Prop firms have become a popular route for traders who want to scale without draining their own savings. But are they actually better than using your own capital? Let’s break it down.
What is a Prop Firm?
Short for proprietary trading firms, prop firms give traders access to capital in exchange for a cut of the profits. You trade their money, not yours, and if you are good at it, you both win. A prop firm will usually test you with an evaluation or a challenge phase first to make sure you know what you are doing.
Benefits of Trading with a Prop Firm
Now that you know what a prop firm is, let’s talk about why you should trade with them.
You Don’t Risk Your Own Money
This one is obvious, but also the biggest pro of trading with a prop firm.
Even the best traders can make mistakes, and losing someone else’s money instead of your own can be better for your psychological health. Think about it – you are not going to lose your rent money trying to earn a big trade if it is not your rent money to begin with.
Access to Bigger Capital
Most retail traders have to start with a small account. So, even if they are making good returns, they would not be making much money. With prop firms, you can access six-figure accounts once you pass their challenges or sign up with them for a fee. Then, even a 2% gain can be huge.
Built-In Risk Management
Most prop firms have rules, and they can actually keep you in check. Daily loss limits, drawdown rules, and no over-leveraging help keep traders from blowing up both the firm’s money and their emotions.
Risks of Prop Trading
Sure, prop firms sound great. But it is not all sunshine. Some of the things you need to keep in mind before signing up include: Some firms have strict rules and a lot of pressure. You have to pay to play. Most prop firms charge you to take their challenge. Some strategies may be banned, so you don’t have full freedom. You also do not own the account.
Trading Your Own Capital
On the other hand, if you trade your own capital, you will have complete freedom. You won’t have someone else’s rules about what you can or can’t do, but that freedom comes at a cost. You have to take 100% of the losses. Growth can be slow unless you already have a big personal account. The emotional toll is heavier as you are losing your own cash.
Are Prop Firms Better?
It depends on where you are in your trading journey. If you are still learning or don’t trust yourself emotionally, it is probably not a good idea to trade with your own money or even a prop firm. But if you have a solid risk management strategy and the patience to deal with rules, prop firms can seriously help with your growth without risking your savings.
Conclusion
Joining a prop firm will allow you to trade without putting up your own capital. This can be a great benefit for many traders. However, it does come with some cons so make sure you evaluate whether or not trading with your own capital or a firm’s capital is the right decision for you.