Domain In Math

Proprietary trading and funded trading are two approaches which, although fundamentally different, provide traders the same opportunity to access capital for trading and profiting. Each model has its own traits in terms of structure, risk, and benefits. For traders wanting to further advance their career, particularly focusing on strategies like Swing Trading or Forex Trading, understanding these differences is crucial. In this article, we will examine the major differences between proprietary trading and funded trading alongside how these models change the strategies employed by traders and their interactions with the firms that sponsor them.

What is Proprietary Trading?

Proprietary Trading, or ‘prop trading’ as it is commonly known, is a trading model in which an investment bank or hedge fund executes trades using its own capital, rather than on behalf of clients. Proprietary trading firms, or “prop trading firms,” maintain a fund positioning constituency of skilled traders and allocate money for trading expecting profits to come from trading. These traders then split the profits that come from their trades with the firm.

All proprietary trades are made for the firm’s own profit and can include activities from trading in stock markets, Forex, commodities, options, etc. Profit Firms aim to generate revenue through trading while managing risk intelligently. Traders employed in a proprietary trading firm are provided with large amounts of capital, trading platforms with advanced features and efficient machinists, allowing the traders to Open big positions and make trades which cannot be executed if funds are limited.

In short, the firm accepts the risk that comes with trading, while it is assumed that the trader will comply with the firm’s governing rules which for such traders would include, risk limits, stretching policies, trading strategies and other mechanisms meant to ensure the trader and the firm’s capital safety and effectiveness.

What is Funded Trading?

Funded trading offers a capital receiving model for traders where they enter into a profit sharing agreement with a firm or trading platform. Unlike in proprietary trading, individual funded traders have less barriers to entry since they are supplied with funds from the firm that has set up a qualifying evaluation or assessment. When the individual trader passes certain objectives like a minimum return on investment paired with taking limited risk, then they are given a funded account with real capital as a reward.

Funded trading has become a popular option for novice traders wanting to make skilled trades without the need of personal capital. A firm providing funded trading services will supply traders with a specific trading amount which traders have to manage according to specific rules and conditions. In turn, traders manage the supplied funds and are paid a portion of the profits inflating from their successful trades while the firm keeps the rest of the revenue.

This model works well as traders are provided funding with little risk of losing their personal assets, however, it does come with some restrictions such as limited risk management, trading styles, and focusable asset classes. Funded trading is seen as a less restrictive option for people interested in Swing Trading and Forex Trading as it enables traders to improve their skills while performing in real market conditions without the chance of losing personal assets.

Funded VS Proprietary Trading

Capital Allocation and Risk.

Proprietary trading and funded trading have a few key differences and the most significant difference is in the source of funding. A firm engages in trading activities using its own capital and takes on financial risk in proprietary trading. Traders are responsible for profit-generating and are compensated a percentage of the profits they bring. A firm will incur all losses while operating as such and will be liable for the losses.

As opposed to funded trading, a trader is allocated capital by the firm, however, as opposed to funded trading, a trader is not liable for the associated losses. What the trader risks is the ability to continue trading with capital provided by the firm. If a trader has detrimental losses that breach their risk management, then they may lose further funded accounts or face repercussions, but essentially, they will not be held personally accountable for the capital. The firm providing the capital will be liable making this a less risky choice for traders on an individual basis, however, these traders still need to operate within an established set of risk parameters.

For those looking to Swing Trade or Forex Trade, the difference in capital allocation becomes rather important. Take Swing Trading for instance, where positions may be held for days or weeks; having greater access to capital tends to provide larger returns. As positions get bigger though, prudent risk management is essential in funded trading where there is a pre-defined maximum allowable risk for a trade or day. The availability of larger trading accounts also aids Forex Trading, especially during the fast-paced, high liquidity, and high-leverage periods as traders can place larger positions to capture smaller price changes.

Profit Sharing and Compensation

As is the case in both proprietary and funded trading, traders are paid a salary as a function of the profits they make. The main difference between the two models remains in the structure of the profit sharing.

A firm dealing in proprietary trade holds the capital being traded; in turn, traders are compensated with a share of the profits. The profit share ratio differs from firm to firm and is directly dependent on their salary structure, but is not often modest. Some proprietary trading firms may offer higher profit-sharing percentages for experienced traders, while others may offer lower shares to attract new talent or minimize risk exposure. Traders who indulge in Swing Trading or Forex Trading are lured in by the opportunity to earn a desired percentage of profits since both strategies can yield consistent profits overtime.

Like with compensated trading, traders in funded trading receive a percentage of profit profit; however, funded trading firms tend to have more complex and varied profit sharing ratios. Oftentimes, traders are required to pay an initial fee or pass certain criteria to obtain the funded account. In comparison to prop traders, funded traders are dealt a harsher profit share split because the funded trading firm accepts less risk by allocating capital towards funding.The split usually ranges from 70-90% of the profits earned, which go to the trader and the remaining splits to the firm.

Traders across both models should be cognizant of the profit-sharing ratio as well as any fees associated with it. Understanding how profit allocation works in conjunction with financial goals will help Swing Traders and Forex Traders choose an appropriate trading model best suited for them.

Rules and Restrictions

Both funded and proprietary trading models have rules put in place to control the firm’s capital along with risk management guidelines. Unlike the two models, the specifics of the rules which bracketed them are likely to differ.

Proprietary trading firms set defined guidelines on risk management, such as maximum allowable drawdowns and stop losses per trade, as well as set styles of trading. These measures are instituted with the strategic aim of having the firm’s capital protected and maintaining disciplined trading by the employees. These firms may allow for greater freedom when it comes to particular strategies, but all traders must still abide by the set risk parameters if profitability is to be attained.

Funded trading firms do not only set lower drawdown limits but are very exacting in the imposable restrictions to traders. For instance, a trader may have to stick to a given trading strategy or exclude some asset classes. Also, most funded trading firms have some daily or weekly loss limits that must not be exceeded, otherwise penalties will be imposed. Funded trading as a concept seems to wade into lesser skilled traders with little knowledge of loss mitigation strategies, so more restrictions are placed to lessen the chances of huge losses.

For traders participating in either Swing Trading or Forex Trading, these specific rules have to be followed. While Swing Trading captures the movements of stock prices for medium-term periods, it can be more forgiving with the position size and holding times which are limited by some funded account trading rules. Likewise, Forex trading tends to use significantly higher leverage while trades are of shorter durations, which means funded trading firms probably have more restrictions regarding how much leverage can be used or how long positions can be taken.

Flexibility and Independence

Trading on proprietary accounts usually gives proprietary trading firms more flexibility and independence in how they manage traders. As a proprietary trader, you are expected to form your own strategies and choose the asset you wish to trade, which is almost the complete opposite of how managed accounts are run. However, you also have the responsibility and perhaps pressure of managing their capital efficiently and in accordance to risk management guidelines.

Funded trading differs from the other types of trading in that it comes with less flexibility, especially for traders who use their specific strategies. Funded trading firms often have more rigid policies on what can and cannot be traded, so the risk that can be taken, the assets that can be bought or sold, and the type of trades that can be executed are highly restricted. While such limitations can be useful to newer traders who need a more rigid set structure, it can be quite constraining to more experienced traders who would like to have more control over their trades.

Both Swing Traders and Forex Traders tend to prefer a certain criteria level of flexibility and independence when dealing with proprietary versus funded trading options. Swing Trading is strategic and executed over long time frames, and thus, is likely to need more freedom than is available under funded trading. On the other hand, Forex Trading is very fast and as such, makes use of the structure provided by funded trading firms. This is especially true where traders wish to sharpen their strategies within controlled environments.

Conclusion

Whether it is proprietary trading or funded trading, both have their advantages in providing capital for a trader to participate in the financial market. The difference between the two is the source of capital and the related risk which comes with it. Each model, however, has its advantages and limitations. A trader who is focused on Swing Trading or Forex Trading needs to analyze the flexibility, profit-sharing structure, and risk management rules of every model. It does not matter if you decide on funded or proprietary trading, what matters is your experience, trading approach, and financial ambitions. In the end, both options can be beneficial for achieving success in the trading scene.