Friday, July 03, 2009

When Should I Consider Joining a Proprietary (Prop) Trading Firm?

I'm receiving a number of emailed questions regarding joining proprietary trading firms. These are professional trading firms in which traders trade the firm's capital and share profits with the firm. I will post some updated advice to the blog shortly. In the interim, please check out the following posts and their links:

Not every trader needs to consider this option. A prop firm is only worth considering if:

1) You need access to trading capital;

2) It will provide you with favorable commissions and trading technology;

3) It will provide you with training and/or collegial interaction that would aid your trading;

4) It has a demonstrated track record of fostering successful traders who trade for a living.

In my opinion, the ideal prop firm candidate is one who has traded successfully on his/her own across a variety of market conditions and wishes to take his/her trading to the next level of size and success. Such a candidate will demonstrate excellent risk management and can articulate a distinctive approach to markets that captures a scalable edge.

I do not recommend new traders for proprietary trading firms. Just as a pro sports team needs to see evidence of success at the collegiate level before drafting a player, a prop firm should see evidence of success before investing in a trader. If you encounter a prop firm that takes all comers, beware; they probably make their money from fees and commissions, not from sharing in your trading success.

Beware also prop firms that cannot give traders significant access to capital. If you don't see large, successful traders at a firm you're considering, don't assume you'll be the first one.