11 differences between prop and retail traders

prop-vs-retail-trading

Would you be happier as a prop trader or retail trader? In this article, we discuss the main differences between independent traders trading prop and retail. Hopefully, by the end of this article, you will have a better understanding of the main differences between these options and will be able to make a more informed decision about your future in the business.

1. Definition (score: prop 0-0 retail)

Prop traders trade the firm’s money, meaning the prop firm has a large deposit with the broker and you will trade the firm’s money instead of your own. They typically request a small deposit from the trader, but they provide almost limitless leverage depending on your trading results. Retail traders trade their own money, have more strict risk requirements, and have limited leverage.

2. Leverage (score: prop 2-0 retail)

Prop traders usually have more money available to trade than retail traders because the prop firm usually has a good reputation and more bargaining power, since it has customers, capital and its own risk management. The advantage of a prop company is that they will give you additional capital to trade according to your trading results. On the other hand, retail traders begin with limited leverage, which is difficult to bargain and change unless you deposit more money into your account.

Example: Imagine that you make a $5k deposit into your retail account. You might have 10-20x ie $50.000,00-$100.000,00 to trade. If, for whatever reason, you had to double your buying power tomorrow, you would need to make another $5k deposit. Prop firms will typically up your buying power based on your results, not your account balance.

Tip: It is always nice to know that you have a substantial amount of capital to work with once you start to make money as a prop trader.

3. Commission Costs (score: prop 5-0 retail)

Due to the high trading volume that a prop firm does, they can negotiate great commission fees with brokers and pass these discounts to prop traders. The retail trader does not have bargain power and it is harder for them to get good commission rates.

Tip: If you do not have a lot of money to start, it is better to start as a prop trader, because you will pay less commission fees during learning time. Once you grow substantially the size of your account and volume, you can negotiate your fees with your prop company or switch to the retail route when trading large lots.

Example: In a prop firm, you pay by share count, not per order. One hundred shares may cost you $0.30 cents, 1000 shares – $3.00, 10000 – $30.00. In retail, you pay $10 per 100,1000,10000 including all exchange and ecn fees. It is best to trade prop with small lots. Once you grow, you can either negotiate or go retail. Other factors can influence this decision as you will see next.

4. Training (score: prop 2-0 retail)

In a prop firm, it is common to offer free training, after all, they make money through their commissions and want to teach you to trade high volume strategies. Most companies also have an office with traders and mentors who can review your traders and offer some guidance. This is a very important, especially in the beginning, when you need theoretical and psychological support to deal with the stress of the markets. Retail traders are free to trade whatever they want, but they will not be able to count on the support of experienced traders and a favorable environment for growth. Some prop companies disclose the results of traders on a daily basis as a way to keep people motivated.

5. Profit Split (score: prop 0-5 retail)

Perhaps the most important difference between prop and retail is the split of profits. A prop company makes money from commissions, but also from a share of the trader’s profits in return for the infrastructure they provide. This percentage varies greatly between companies and traders because it takes into account the trader’s results, risk, capital invested, trading style, etc. On the other hand, the retail trader retains 100% of the profits.

Tip: Always negotiate the percentage of your profit as your income grows.

6. Technology (score: prop 1-0 retail)

Usually prop traders have more tools at their disposal, but now, with so many breakthroughs in technology, retail traders can use the same tools such as sophisticated trading platforms and real time news. In some cases, prop traders may get discounts on trading platforms if the prop firm has some kind of partnership with the platform company, but generally this discount is not substantial, and the discount may not be passed on to the trader. The prop company usually provides a fast computer and at least 2 monitors at no cost to the trader with a usage charge if commission targets are not met.

7. Market Data: (score: prop 0-2 retail)

The difference is a bit hazy here because technically prop traders are professional traders, so they must pay much more than retail traders for exchange data, but depending on how you trade and your country, these fees could be waived.

Tip: Before trading with a prop company, ask for all exchange data costs to avoid end of month surprises. In the beginning, every penny matters.

8. Work environment: (score: prop 2-0 retail)

In a prop firm, sometimes you have an option to work remotely (work from home), but in general, trading in an office is the best choice because you can exchange ideas with other traders, share trades, attend classes with mentors, monitor group profits and in addition, you’ll have access to leading technology infrastructure such as power backup, internet backup, computers and next-generation displays. The downside is that you are expected to trade every day, and you may be charged with rental fees, after all, you are taking the place of another trader. On the other hand, retail traders are responsible for 100% of these costs.

Your mentor will always encourage you to trade large lots, if your results are good. Besides, in an office, experienced traders can profit 50x more than you, and you should think of that as a great incentive. Retail traders might take longer to evolve, as they do not have experienced traders to push them. Of course, retail traders can be motivated in other ways, but seeing the trader next to you making $50k in a day is a great motivator.

9. Risk Management: (score: prop 1-0 retail)

In a prop firm, the risk manager may set loss limits and special conditions to increase your profits and limit losses, such as block traders when they hit the target, set a daily loss limit, disable certain roles, etc. Such measures keep the company in good financial shape, but also discipline the trader. Retail traders may also set rules for themselves, but chances are that they will be broken much more often.

10. Selection process: (score: prop 0-1 retail)

In general, the best prop firms have some selection criteria. They often prefer people with little or no market experience so they can teach the strategies used in the office. However, retail traders don’t need to go through this. They may simply open an account with a retail firm and start trading right away.

11. Strategies (score: prop 0-2 retail)

In a prop firm, you may have to trade the strategies that are most cost-effective for the company, but may not be compatible with your style or your level of aggressiveness. Some traders like to scalp while others prefer to swing trade. In the prop world, you will have to learn the strategies of the firm, unless you are an experienced trader that does serious volume. Be sure to always ask what you can and cannot do when choosing a prop firm. Retail traders are free to trade whatever they want and however they want.

Conclusion:

You may have noticed the score given to each comparison we made.  On the scoreboard, the prop beats the retail trader by 13-10, but it was a very tight result. This does not mean that you should choose prop over retail, but you should think carefully about which model fits you better.

In the next article, we will list some of the pitfalls that prop traders should avoid. For more tips and information, follow our blog by placing your e-mail below and create a free account at Trademetria to improve your performance in the stock market.

I am Thiago Ghilardi, founder of Trademetria. I traded prop for 4 years, owned a prop firm until the 2008 crash. I am now a fully automated trader trading futures contracts on Meta Trader 5.

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11 differences between prop and retail traders
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