In this episode of Truth About FX, Walter goes deep into prop trading and learning its ropes. He shares some key points on this and why some traders does not qualify even after years of trying. And you will also find out how this one guy was able to turn the tides and made prop trading work for him.
Download (Duration: 05:50 / 13.3 MB)
In This Episode:
00:37 – started in stocks
01:42 – qualification period
03:01 – dangle the carrot
05:06 – more profits as you go
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. I know we’ve kind of touched on this on the last episode of the podcast but what is prop trading and how does it work?
Walter: So, this is how prop trading works. I think it started in stocks – with stock traders – but essentially, what happens is you join a group. Normally, what will happen is they teach you how to trade and they’ll teach you their methods and what they deemed the way that you should trade.
And then they’ll say, “Now, what we want you to do is qualify and show us that you’re a good enough trader. Once you do, we’re going to give you a little chunk of money to trade. We will keep most of the profits that we make on this little chunk of money and you get to keep some of it”.
For example, the first time that I had a job like that I was getting 9% of the profits. The group was getting 30% of the profits. So the 21% went to the company, 9% went to me and then the remainder of the profits, the 70% went to the client who deposited the funds.
So, that’s kind of prop trading. It’s basically a great idea. The idea is, “Hey, if you’re good at trading but you don’t have any money, come to us and trade for us and we’ll give you some of the profits.”
But normally, what will happen is that there’s a qualification period. There are no restrictions on that. You have to take x number of trades or you have to have less than x drawdown or, you have to have more than x returns. Whatever it is, usually those restrictions apply to the qualification period too even if you’re only trading demo.
You might not be trading a live account so that is something to keep in mind. You want to make sure that your style of trading fits with what they are looking for. Some of the drawdown stuff you can change that.
If you’re using a fixed fractional method of risk management. So you risk, for example, 1% and they tell you you can’t have more than a 6% drawdown and you know that you’re probably going to have a 6% drawdown when you’re risking 1%, you can normally reduce that.
Like, if you reduce your risk to a third of 1% or a quarter of 1%, you can probably go around that. So that is definitely a risk thing but there are other things in there that you have to pay attention to which are going to be like, maybe they only want you to take 10 trades a week and you normally take 30 trades a week or whatever it is.
So, you just had to make sure that there’s a good match between what they’re looking for and the style of trading that you do. I think, I mentioned this in the last podcast. Just keep in mind that some of these are kind of shady operations where they dangle the carrot of, “Hey, you can come trade for us.”
I knew somebody who ran one of these things and he — I’ve mentioned this before, some of you may not have heard it — he didn’t actually tell the people who are qualifying to trade for him that when they’re trading demo, they were actually trading live accounts. They didn’t know this and then he reversed their trades because he knew that most people wouldn’t qualify, that most people would lose money and that most traders let their losers run and they cut their winners short.
So, he knew that would make money and it did. It worked. It was a tricky thing to do with people because all he really wanted was losing traders. He didn’t really want winning traders. He got some and some of them he would hired but that was rare.
So, just keep in mind some of these operations are not, they are not very upfront. They’re not really going to tell you exactly what is going on. You need to be careful. You probably didn’t want to give anyone any money. You want to make sure that the qualifications make sense. That you know that you can qualify, that you’re going to take the number of trades that they want and you’ll be able to avoid the drawdown that they have and that sort of thing.
Sometimes, you’ll talk to people and some of these organizations, they have people that have been trying to qualify for years. It’s crazy. What does it tell you? It tells you either the person just keeps making the same mistake or they’re just not good fit.
Their style of trading doesn’t fit with what the group is looking for or what the company is looking for. It’s an interesting way of going about it. I just think that for a lot of traders, it sounds like a really good idea but they just have to keep in mind, it’s just like finding a mentor.
You need to find a mentor that resonates with you. If you’re going to be a prop trader, you’ve got to trade with a company where your style of trading fits in with what they’re trying to do with the accounts.
Normally, what will happen is you’ll get bigger and bigger accounts as you go. As you start trading out, you might trade on a demo then you’ll qualify. They’ll give you a small, $10,000 account or whatever and then they’ll start ramping it up as you go. They’ll often also, give you more profits as you go.
Although sometimes, it gets capped because if you’re trading lots and lots of money, it’s capped. You just make more as your account get bigger. That is basically all prop trading is. It’s just something that’s been handed down from the share traders that came from the stock trading world.
Hugh: Okay, cool. Thanks for all the tips, Walter.
Walter: Thank you.