Prop Trading vs Retail Trading (2024)

FAQs

What is the difference between a retail trader and a prop trader? ›

Professional trading requires licensing, which means the people making trades on your behalf—or you, if you're a prop trader—may be required to obtain a securities license for a prop trading account. 3 On the other hand, retail accounts don't require any training or paperwork.

They're given harsh targets, limited time, no support, and huge leverage – a perfect storm! It's not surprising that 95% of traders fail their challenges!

Trading your own money means total control of how you want to trade, but the trade-offs for that control may not be for everyone. At the end of the day, prop firms and brokers are just tools to express ideas and manage risk, and either can be a good option for any trader if used properly.

The salary of a prop trader can vary greatly depending on several factors such as experience, performance, and the size of the firm. On average, a junior prop trader can expect to earn anywhere between $50,000 to $100,000 per year, while a senior trader can make upwards of $500,000 annually.

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity. It's arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you'll earn some percentage of it.

Unlike when acting as a broker and earning commissions, the firm enjoys 100% of the profits from prop trading. As a proprietary trader, the bank enjoys maximum benefits from the trade. Another benefit of proprietary trading is that a firm can stock an inventory of securities for future use.

So, what are the reasons behind this shocking statistic? Trading is a skill that requires education, practice, and experience. Most traders fail because they do not invest enough time and effort in learning about the markets and trading strategies.

The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.

The average prop trading salary in the USA is $210,000 per year or $101 per hour. Entry level positions start at $146,300 per year while most experienced workers make up to $250,000 per year.

Personal Risk: One of the significant drawbacks of prop trading is the potential personal financial risk. If a trader doesn't perform well, they may lose their deposit, and in some cases, their job. Loss Limitations: Prop firms often implement daily loss limits to protect their capital.

What if a prop trader loses money? ›

Profits from trades are generally divided between the firm and the prop trader; however, the risk distribution is asymmetric. This means that in the event of a loss, the trader bears 100% of the losses, while they don't receive 100% of the profits.

Copy trading in prop firms is a method that allows traders to replicate the trades of other traders in real time. It allows traders to replicate the trades automatically and manually. The method helps novice traders to learn more about trading. Moreover, it promotes a supportive trading environment.

At its core, the prop firm challenge can be a way for prop firms to make money from failed challenges. This is because some sources have the failure rate of prop trading challenges at 90%. So for every 10 traders that buy a challenge, 9 will fail. That can be a lot of money for a prop firm.

Hedge funds are a much safer investment when you are uncertain as an investor. Even though prop trading is the same, it is much riskier as you are using a prop firm's money to profit. Leverage: When it comes to leverage, hedge funds use aggressive techniques to manage their assets.

According to it, 4% of traders, on average, pass prop firm challenges. But only 1% of traders kept their funded accounts for a reasonable amount of time. While this result is not nearly as bad as the one discussed earlier, it still looks bleak for prospective prop traders. But why is the percentage of failure so high?

Prop firms specialize in trading strategies and financial instruments such as equities, commodities, or options. On the other hand, traditional trading pertains to traders who trade using their capital. These traders can be individuals operating from home or professionals working in institutions or hedge funds.

Definition and Overview

Proprietary trading, commonly referred to as prop trading, involves financial firms, especially those specializing in securities, equities, derivatives, forex, and the futures markets, trading their own money for direct profit, rather than earning commission by trading on behalf of clients.

A retail trader is an individual trader who trades with money from personal wealth, rather than on behalf of an institution. A retail trader is someone who trades their own money, but not for a living. They buy or sell securities for personal accounts (PA).

Risk and reward

Proprietary trading will involve higher risk levels because of the speculation of the financial market. Gains and losses can be significant due to the amount of leverage investors use. Physical trading is less risky mostly due to the supply and demand of the commodities.