There are many advantages of using a proprietary firm when trading on the foreign exchange (Forex) market, but if you want to benefit from these, it is important to adhere to the rules first.
What is Forex trading?
Prop firms are great for those just starting out, as well as traders who are more experienced and simply want to increase the funds they can trade with.
To fully understand how to start using a prop firm, it is important to get to grips with what Forex trading is.
It is the act of buying and selling currencies with the hope of making a profit. For instance, traders pair the currencies, such as EUR/USD, and trade the Euro against the US dollar or vice versa.
It is affected by other trades, the country’s economy, and wider geopolitical news, with the trader trying to judge the subsequent changing value of each currency.
Transactions take place all the time, as the market is open all around the world, 24 hours a day. Therefore, traders can work when they want, wherever they want, making it very tempting to start investing in the market.
Why is it good to use a prop firm?
The reason why so many Forex traders, whether they are just beginning their new career path or have been going for a while, choose to use a prop firm is because they can access more capital by doing so.
Prop firms can provide tens, or even hundreds, of thousands of dollars, in a trading fund, which means people will be able to take larger positions and earn a much higher profit. They will be able to make gains that would, otherwise, be unachievable if they only use their own money.
At the same time, as they are not trading with their own assets, they do not incur any losses should the trade not go to plan.
Saying this, prop firms have strict risk management procedures in place to avoid losing lots of money. This enables traders to focus their attention on trading rather than implementing risk management strategies, as they know the prop firm has it in order.
Another reason for using a prop firm is to learn new strategies and insights. Some provide training for traders during the evaluation process, or there is often the opportunity to chat with other traders to share their ideas and experiences. There is also sometimes a team of experts who can offer advice and support.
By learning from other people’s wins and mistakes, Forex traders will be able to improve their own skills and strategies, helping them gain higher profits and boost their reputation.
It is also worth joining a prop trading firm to take advantage of the advanced technology it provides, including analytical tools, algorithms, charting software, and trading platforms.
This helps traders determine the best course of action, based on the data analysis, and the most up-to-date market trends. Therefore, they can trade more quickly, while taking on less risk.
Rules of using a prop firm
As there are so many benefits of using a prop firm, it is only right they come with some rules, so that Forex traders do not take advantage of the huge amount of capital they now have access to.
Stop loss
For a start, traders have to place a stop loss on all their trades within 60 seconds of making one. This automatically sells an existing shareholding if the price falls below a price you set.
It is intended to reduce the amount of loss you incur should the price unexpectedly fall, as it enables you to exit before losing too much money.
The exception to this is for those who buy a ‘no stop loss’ add-on, meaning they can risk any amount per trade. However, they need to be aware that prices could fall below a level they are comfortable with and they could end up making a substantial loss.
Scalping
All trading styles are typically accepted by prop firms, which means traders can use long-term strategies or they can adopt a fast-paced style, otherwise known as scalping.
This involves them holding currencies just for a very short amount of time before they sell, making a small profit in the meantime. Although their gains are only very little, as they make so many during the time, they quickly add up, making this style of trading very profitable and, subsequently, very popular.
Prop firms generally allow scalping, but request that trades are open for at least 30 seconds. If a trader is seen to open and close trades quicker than this on several occasions, they might be penalised in the form of having their account terminated.
Monthly trade
While some Forex traders make a living out of buying and selling currencies, many do it while still holding down a job and trying to be present in their family life. That is why it can be several days or weeks between them making trades.
Alternatively, they might prefer a long-term strategy when it comes to trading, buying and holding on to a shareholding for a considerable amount of time to try and gain as much profit as possible.
While all strategies are accepted by the majority of prop firms, they generally ask that traders make at least one trade every month. This does not mean they have to trade on each of their accounts, so they can leave some for longer, as long as they are acting on another fund.
Failure to trade every 30 days could see their account terminated by the prop firm.
Use of an Expert Advisor (EA) or robot
These days, artificial intelligence (AI) is becoming more prevalent in all aspects of life, including trading.
Those who want extra help with their trades could use an expert advisor (EA) or robot, which automatically provides trading strategies based on analysis of market data.
The software programs are able to identify opportunities based on market trends and predetermined patterns.
Traders can use these not only for guidance, but to open, monitor and close trades on their own. Therefore, they can entrust all the actions of their trading on their EA or robot without having to intervene themselves.
Whether these are allowed is down to each prop firm, as they may allow some EAs or robots and not others.
For instance, they might not accept EAs that are used for tick scalping, which is the art of conducting lots of trades in a very short period, or reverse arbitrage trading, which involves combining a short position and a long futures position in the same asset.
Copying trades from prop firm accounts
Traders who have funds outside of their prop firm’s might be able to replicate their trades. However, there may be restrictions when it comes to copying them from their prop firm accounts.
Additionally, there could be rules not allowing them to copy trades to multiple accounts. Therefore, it is important to look into the terms and conditions carefully to see what the restrictions are.
Not sharing passwords
Prop firms do not allow their Forex traders to share their passwords. As the process to being accepted for funding is personal to the skills and credentials of the applicant, they cannot risk letting someone else take control of the account.
