What Is Prop Trading? Beginner’s Guide

Learn what proprietary trading is, how prop trading firms work, and how to qualify for a funded trading account in this beginner’s guide.

Proprietary trading, commonly known as prop trading, is an intriguing and potentially rewarding avenue in the financial world. Whether you’re new to trading or looking to elevate your skills, understanding proprietary trading can unlock opportunities that go beyond traditional trading methods. In this beginner’s guide, we’ll explore what proprietary trading is, how it operates, and why it might be worth your time. We’ll also compare it to retail trading and outline the steps to qualify for a funded trading account, giving you a clear path to get started.

Why Learn About Proprietary Trading?

Why should you care about proprietary trading? For many traders, the answer lies in the unique advantages it offers. Unlike traditional retail trading, where you’re limited by your own capital, proprietary trading allows you to trade with a firm’s money—often in amounts far exceeding what you could access personally. This can amplify your profits and accelerate your growth as a trader. Additionally, prop trading firms provide professional training, advanced tools, and a collaborative environment, resources that can be game-changers for beginners and experienced traders alike.

If you’ve ever felt constrained by a small trading account or wished for expert guidance to refine your strategies, proprietary trading could be your next step. It’s a way to trade smarter, not just harder, while minimizing your personal financial risk.

What Is Proprietary Trading?

So, what exactly is proprietary trading? According to Investopedia, proprietary trading is “when a bank or firm trades stocks, derivatives, bonds, commodities, or other financial instruments in its own account, using its own money instead of using clients’ money.

In simple terms they use the firm’s own money and have talented traders make a profit for themselves rather than clients.

Unlike traditional broker firms that execute trades on behalf of customers, proprietary trading involves the firm taking on all the risk and reward.

How Do Prop Trading Firms Operate?

Understanding how proprietary trading works means looking at how prop trading firms function day-to-day. These firms recruit skilled traders, equip them with the firm’s capital, and let them trade a variety of financial instruments—stocks, forex, futures, and more. In exchange, traders share a portion of their profits with the firm, typically payouts range between 50% and 80%, depending on the agreement.

Here’s a breakdown of how most prop trading firms operate:

1. Recruitment: Firms seek out talent through online applications, trading challenges, or referrals. Some, like We-Fund, offer evaluation programs where traders can demonstrate their abilities.
2. Training: Once onboard, traders often receive training tailored to the firm’s strategies and risk management protocols. This might include workshops, simulated trading sessions, or one-on-one coaching from seasoned traders.
3. Evaluation Process: Before granting a funded trading account, firms require traders to pass a test on the trading platform —often called a “challenge.” This involves trading a demo account under specific rules, such as hitting a profit target (e.g., 10% of the account) while keeping losses below a set threshold (e.g., 5% drawdown). The goal is to prove you can trade profitably and responsibly.
4. Live Trading: After passing the evaluation, traders gain access to the firm’s capital and start trading live markets. They keep a share of the profits know as payouts, while the firm benefits from their success without risking its own traders’ personal funds.

This system creates a win-win scenario: traders get to leverage substantial capital and professional support, while the firm profits from their trading prowess. It’s a model designed to attract skilled individuals who might not have the resources to trade at scale on their own.

Benefits of Proprietary Trading vs. Retail Trading

o fully grasp the appeal of proprietary trading, it’s helpful to compare it to retail trading—where individuals trade their own money through a brokerage account. Here’s how prop trading stands out:

• More Capital: Retail traders are capped by their personal funds, often starting with just a few thousand dollars. Prop traders, however, might trade with $50,000, $100,000, or more, magnifying their potential returns.
• Professional Resources: Prop trading firms offer training, mentorship, and cutting-edge technology—things retail traders must source independently, often at great expense or effort.
• Teamwork: Prop trading often involves a collaborative environment where traders share insights and strategies. Retail trading can be solitary, lacking the camaraderie and learning opportunities of a team.
• Lower Personal Risk: With prop trading, you’re using the firm’s money, not your own. While some firms may hold traders accountable for losses, many absorb them as long as guidelines are followed—unlike retail trading, where losses come straight out of your pocket.
• Bigger Profits: More capital and better resources naturally lead to higher earning potential. A successful prop trader can outpace a retail trader simply due to the scale of their trades.

Here’s a concise list of the Top 5 Benefits of Proprietary Trading:

1. Access to capital
2. Professional training and support
3. Potential for higher profits
4. Collaborative team environment
5. Opportunity to learn from experienced traders
   

Next Steps: Qualifying for a Funded Trading Account

Ready to dive into proprietary trading? Here’s how you can qualify for a funded trading account and start trading with a prop firm’s capital:

1. Find a Reputable Firm: Research prop firms with strong reputations and clear processes. WeFund, for instance, offers a transparent funding model that’s beginner-friendly.
2. Prepare Your Skills: Before taking an evaluation, hone your trading strategies and risk management techniques. Consistency and discipline are key to passing the challenge.
3. Take the Evaluation: Apply to your chosen firm and complete their trading challenge. You’ll typically trade a demo account for a set period (e.g., 30 days), aiming to meet profit goals while staying within risk limits. Success here proves you’re ready for the real thing.
4. Trade with Firm Capital: Once you pass, you’ll receive a funded account and can start trading live, sharing profits with the firm as you go.
   

Conclusion: Your Path to Proprietary Trading

Proprietary trading offers a powerful way to supercharge your trading career. With access to larger capital, expert training, and a team to back you up, it’s a step up from the limitations of retail trading. While it comes with challenges—like the need for discipline and the pressure to perform—the rewards can far outweigh the risks for those who are prepared.

If you’re excited to explore firms for trading, why not start today? Check out WeFund where real traders, trade. visit our home page to see how it works, and read our FAQ for any more questions on trading operations, empowering traders. Ready to take the leap aspiring traders ? 

Join the right firm today