Let’s Get Started
There are a billion ways to trade, and we are here to help you find the best of them. Forex prop trading and traditional trading are both two different ways of trading. Both of them entail a set of advantages and disadvantages. They have their own set of strategies, risk profiles, and operational nuances. While both aim to generate returns and build wealth, they operate on fundamentally different principles and strategies. Don't know which one to go for? Let's find out which one works best for you!
What is Forex Prop Trading?
Forex prop trading refers to a type of trading where traders trade on behalf of the firm using the firm’s money. Here, traders do not have to use their funds. Hence, they bear no risk. Traders adopt this method of trading because they have nothing to lose but a lot to gain. There are certain guidelines that traders have to keep in mind and certain objectives that they have to achieve. Once done, they become the firm’s full-time prop trader. Exciting innit?
What is Traditional Trading?
Traditional trading is when traders trade for themselves or their clients. The capital used for trading here belongs to the trader. Hence, all the winnings and losses are borne by the trader. There are no guidelines that need to be followed here. Traders trade as per their desired strategy.
Difference between Forex Prop Trading and Traditional Trading
.png)
MEANING
Forex Prop Trading: Forex prop trading is when traders trade on behalf of the company in return for a share of the profit.
Traditional Trading: Traditional trading is when traders trade using their personal capital and bear all the profits and losses that they incur.
MARKET
Forex Prop Trading: Forex prop trading specifically focuses on the forex market.
Traditional Trading: Traditional trading focuses on a broader range of markets, including equities (stocks), bonds, commodities, and derivatives.
CAPITAL
Forex Prop Trading: In prop trading, the capital used to trade belongs to the company.
Traditional Trading: In traditional investing, the capital used to trade belongs to the trader.
TRADE DURATION
Forex Prop Trading: In prop trading, trades are usually held for a few minutes, hours, or days, i.e., for a short period.
Traditional Trading: In traditional trading, trades are usually held for a few months, years, or decades, i.e., for a long period.
RISKS
Forex Prop Trading: Traders do not face any losses, while prop trading, companies do, as their money is at stake.
Traditional Trading: Traders face all the losses as they are trading using their own capital/money.
PROFITS
Forex Prop Trading: Here, profits are shared between the company and the trader as per the profit split ratio. What is the ratio? It is mentioned in the trading challenges.
Traditional Trading: Here, the trader keeps all the profits, just as they bear all the losses. Both exciting and scary, isn't it?
RULES AND REGULATIONS
Forex Prop Trading: As the company trusts the traders with their capital, they form a set of rules that the traders have to follow. This is done by firms to safeguard their capital. It's like the firm's seat belt on a fast roller coaster.
Traditional Trading: Traditional investing doesn’t involve any set of rules, as the traders themselves are trading with their money. There is no third-party involvement.
RESOURCES
Forex Prop Trading: Prop firms provide their traders with a range of resources and tools so that they can analyze and trade better.
Traditional Trading: Traditional traders are not provided with any such resources or tools. The ones that they use are scouted by them only.
LEVERAGE
Forex Prop Trading: Prop firms provide their traders with the option of increasing their account size with the help of leverage.
Traditional Trading: Traditional trading usually involves less leverage. The account size increases here due to wealth generation.
TRADING STRATEGIES
Forex Prop Trading: Prop traders employ a range of short-term strategies, such as scalping, day trading, etc.
Traditional Trading: Traditional trading strategies focus on long-term value, such as buying, and holding, etc.
REGULATION
Forex Prop Trading: Prop firms are not very strictly regulated. Hence, all prop firms have their own set of guidelines.
Traditional Trading: Traditional trading firms are heavily regulated by financial authorities.
Which One is the Right Choice?
Both prop and traditional trading have their own set of pros and cons. It is essential for a trader to understand both before making a choice. Traders should weigh the benefits and drawbacks of both trading methods to choose the one that suits them the best. Even though prop trading looks attractive as most traders believe they will be able to earn loads without risking their capital, it is not entirely correct as it requires skillful trading. By referring to the context above, you will be able to weigh the good and the bad parts of both approaches and choose the style that fits your goals.
Phew, which one to go for then? Well, your personal choices, the level of risk that you are willing to face, and your trading objectives will all play a huge role in your decision between prop trading and regular trading. When it comes to prop trading, it might be alluring if you can handle performance pressure. Whereas traditional trading could be a better option if you are willing to be on your own and don't want any interference. Knowing the main differences between these two methods will help you design a trading strategy that goes well with your unique goals.