Proprietary Trading is a sought-after trading role job for both beginners and professional traders alike.
This is because there is no significant amount of capital needed to begin – as traders trade on behalf of a firm’s capital – and because the opportunity for advancement is much faster than other trading types due to the potential profits available.
If you’re a graduate fresh from University, or a beginner trader that can’t afford to part with the copious amounts of capital required to begin trading the financial markets, you may be wanting to start your trading career in Proprietary Trading.
However, landing your first role in a proprietary trading firm is not an easy task. Trading on behalf of firms and other financial institutions brings with it higher risks, so proprietary trading firms have strict criteria for their traders.
Traders who are humble, intelligent and logical, that can trade competently, possess good risk management and above all, have a passion for trading, are highly desired.
But how do you reach the heights required to get into a good proprietary trading firm? Our guide is here to help. Full of tips and insider tricks, we’ll explain the qualifications and background needed, as well as how to ace your prop firm interview, and most importantly, how to consistently make yourself the best proprietary market trader.
So if you’re ready to take the first step, let’s get started.
What is Proprietary Trading?
Proprietary trading is a type of trading where traders buy and sell trading securities to make a profit. Trading securities refers to trading assets like commodities, equities or forex instruments that are traded on active global markets.
As Proprietary Trading usually requires substantial capital to trade effectively, Proprietary (or ‘Prop’ for short) Traders usually trade on behalf of proprietary trading firms and other financial institutions like hedge funds.
How does it work?
Proprietary trading works by prop traders trading assets such as cryptocurrencies (like Bitcoin), commodities, equity and Forex (FX), on behalf of their clients.
In proprietary trading, the most common types of trades are either:
- Directional Trades: Where a trader makes a trade based on the probability of a trade security’s price trending either up or down
- Market-making Trades: Where a trader acts as both a buyer and seller of securities with an aim to make a profit on the difference between the price at which the security can be bought, and the price at which it can be sold. This is known as the bid-offer spread.
An example of a proprietary trade
An investor wants to sell 200,000 shares of a stock at $10.00 per share, but is unable to find buyers willing to purchase the shares at that price.
A proprietary trader offers to buy the entire block of shares from the investor at the $10.00 asking price. The proprietary trader then analyses the market to find suitable trades where the shares would sell for more than their original $10.00 price.
This is an example of a market-making trade, and if successful, would leave the proprietary trader in profit.
What are the advantages of Proprietary trading?
Working as a proprietary trader in an established firm brings with it a whole raft of advantages. The most notable include:
- In a proprietary trading firm you will work alongside experienced traders who can help you become profitable by teaching you in real time.
- Proprietary trading allows you to trade on live accounts which contain access to larger amounts of trading capital than those just starting out would have access to.
- When compared to retail day traders and individual traders, the trading costs and commissions of proprietary trading are significantly reduced
- You will have access to unlimited tutoring and training sessions from professional and experienced proprietary traders.
- There is no need to find a minimum account balance to begin trading as you will be trading the firms capital, as is required in other forms of trading like Forex day trades.
If you are a brand new trader, the experienced training available in proprietary firms is invaluable. You will be able to learn firsthand from people who know how to make successful trades, whilst not compromising your own money.
Background, i.e Qualifications/Education
There is no such thing as the ideal prop trading candidate. Proprietary trading firms prioritise drive, desire and the passion to succeed in a trading career over experience.
From an educational standpoint, proprietary trading firms mostly require candidates to have an undergraduate or Master’s degree in one of the following “target” subjects:
- Computer Sciences
- Engineering degrees from universities regarded as ‘Top Universities’ and degrees from lower-tier universities with good rated technical programmes.
Away from education, proprietary trading firms will also look for a candidate with experience in an area which has allowed them to learn the mental mathematics, laws of probability and programming skills required in proprietary trading firm interviews. These areas could include:
- An internship undertaken at some stage
- Computer programming experience and familiarity with C, C++ and Python
- Networking experience. If a candidate has a degree in something other than the desired target degrees, networking is seen as more important.
Typically, most proprietary traders begin their careers fresh from degree programmes but that shouldn’t dissuade wannabe traders who may possess work experience instead and are seeking a change.
Those who have experience in asset management or other subjects related to the public or financial markets possess a similar level of educational background required to begin entry-level proprietary trading.
No matter their educational background or work experience, to make it as an entry-level Prop Trader candidates must be to remain calm under pressure, scrutinise everything, think decisively and logically on their feet, be thick skinned and be humble enough to own up to and proactively fix their mistakes.
Unfortunately traders who do not possess qualities similar to the above and who struggle under pressure or become stressed easily are unlikely to succeed as traders.
Once you’ve either completed a degree or internship, or you’ve got enough of the personal attributes and working experience behind you, the next stage after your application has been accepted is the interview process.
Whilst different proprietary trading firms have different interview methods and questions, most interview processes will include the following sections.
Math is essential to trading, and the ability to calculate figures quickly is a core part of the job so mental math challenges are bound to appear at some point.
You should expect either direct mental math questions, using mental math as part of solving a bigger question or equation as well as sequence tests if you have previous trading experience
Concepts worth preparing for in advance include:
- Calculating a sequence of consecutive numbers
- Estimating square roots of numbers
- Quickly calculating expected values, for example the EV of a dice.
- Calculating probabilities of rolling sums, for example rolling two dice
- Square numbers up to 20
Proprietary Trading Interview Questions
As well as mental math and math problems, there are a variety of questions that also appear in proprietary trading firm interviews.
Questions can range from probability questions, to market making questions, to standardised questions such as the interviewer enquiring after a mistake you have made in your life and what your process was to correct it.
Sometimes proprietary trading firms throw in brainteasers to gauge how well you think on your feet, so be ready to stay calm and answer thoughtfully and honestly.
Problem Solving Processes
Just like brainteasers, proprietary trading firm interviews will often set a problem solving challenge and these won’t always be mathematical.
One thing to keep in mind is that your problem solving process will be more valuable than your answer. Prop trading interviewers are more curious about how you approach and set about solving challenges as well as how well you can articulate your thought process.
One reason for this is because in Proprietary Trading there are events called Prop Shops. These are either physical or nowadays, virtual, locations where Proprietary Traders meet and combine their stakes with other traders using the Shop’s facilities. As these are team events, you will need to explain your trading ideas or movements in front of the many traders at these Shops, so articulation is a key requirement interviewers check.
To handle this, remember to talk everything out and try to prevent yourself from becoming sensitive or defensive if you’re confused or stuck. Instead, take a breath, ask questions and float ideas.
As traders, current events that can affect global economies (like Brexit) make up a significant portion of our strategies. Part of a traders day will be analysing and evaluating any overnight happenings to theorise and predict what impact (if any) they could have on the global markets.
So, if in an interview environment a candidate isn’t able to comprehensively explain a current global event, nor make a prediction on what effect it may have on the markets, this could hinder their chances.
If you have either technical or fundamental analysis knowledge, show this off once you are asked about the possibility of an event impacting a market. This is a sign of a candidate who is displaying passion and confidence in their abilities.
It’s a pretty standard interview question for any applicant in any industry, but you should do your research on the firm you’re applying for.
Some firms trade different instruments, others have different funded accounts, others will vary in their training and experience, and so it’s best to know exactly who you’re applying to and what you could be signing up for.
Expect to be asked questions as to who founded the firm, what type of trading they do, and what products, assets, or instruments they trade.
There are a plethora of prop trading firms in the United Kingdom alone, so we won’t list them all here.
What we will recommend instead is that when you begin your proprietary trading journey, look for a reputable firm with good reviews and happy traders.
Unfortunately there are dishonest proprietary trading firms out there that taint prop trading for everyone. These firms encourage candidates to pay large sums of money for training courses, and then only allow their traders to actually trade a small amount of capital or often no capital at all.
This is a burden to any new prop trader as the only way to learn is by doing, and that means experiencing real trades, making real mistakes, and creating real strategies.
To identify a legitimate and honest proprietary trading firm, look out for:
- A firm with years of demonstrable experience, led by experienced traders
- Good reviews on trust sites like TrustPilot and GlassDoor
- A firm that provides access to training and places you in a team that are all developing and growing together
- Allowance to keep a fair percentage of the profits, 50% is considered fair.
Examples of firms that tick these boxes include Jane Street, Optiver and TransMarket Group, so when you’re doing your research, compare your firm against names like these to make sure you are getting a fair deal.
Remember too that there’s always us at Alphachain Academy. We are a proprietary trading firm started by two knowledgeable traders, Adam Haeems and Gavin Pannu.
Between us, we have experience such as Adam’s, trading on the fixed income futures desk at Bank of America Merrill Lynch in London before moving onto a $1bn global macro hedge fund, and Gavin’s, being an experienced Prop Trader of a multi strategy fund for over 6 years as well as certified market technician with both the STA and IFTA organisation.
At Alphachain Academy, our firm reflects our experience. Our Senior Traders teach our new traders how to trade in the current market conditions through mentoring and watching live trades take place. In addition, each and every trader that joins us gets guaranteed $20,000 starting capital, which doubles each time a target is achieved.
All of our courses are CPD certified courses and taught by traders with real world institutional trading experience. Plus, our training materials are constantly updated so that they provide real time analysis and strategies applicable to today’s market conditions. None of what we teach our traders comes out of books, it comes from real world application and knowledge gained across years of trading.
Outline of roles, starting from beginner. What they entail, what progress is needed to jump to the next.
The jobs available to new traders start at entry level and then gradually move up as traders become more experienced. There is usually a 3 step ladder:
- Clerks or Assistant Traders
New traders who are coming to the firm with little to no trading experience, and are without qualifications in one of the core degrees, may find themselves beginning as a clerk or assistant trader.
Typically, an assistants day at a Proprietary Trading firm could consist of spreadsheet work, coordinating systems, booking trades, running sheets, preparing portfolios and learning areas such as legal, compliance and operations. Training sessions often take place after hours and teach assistants areas such as learning to make markets.
Alphachain Insider Tip to Progress from an Assistant to Junior Trader:
Whilst you’re an Assistant, never stop learning about trading. You may not get much of a trader’s time, but if asked, have one or two trading ideas ready.
In the beginning your ideas may not be of substance, but a good trader will give you valuable and constructive feedback so that you can learn for the next time.
Eventually you’ll grow in confidence and knowledge, and should be able to generate solid ideas. If a trader opts to put your trade on, study it. Study how they execute the trade, what their choice of instrument is and their strategy because all of these elements are vital.
Over time you will become more consistent with your ideas. They will have better structure, better timing and a better overall perception of how the idea will work and if it will execute correctly. Once you are given the freedom to put a trade on yourself, you will no longer be an assistant.
- Junior Trader
This is usually the position where undergraduates fresh from graduation begin.
A Junior Traders responsibilities will typically be to support the trading strategy in the trading firms key markets, actively trade in the global markets, to work with the trading team to implement and test strategies, as well as implement and test algorithms.
Alphachain Insider Tip to Progress from a Junior to Senior Trader:
Becoming a Senior Trader won’t happen overnight, but Junior Traders can prove their worth by displaying certain valuable traits.
Trading is a fast paced environment, but traders need to be able to learn quickly and think quicker. The information thrown at Junior Traders may be overwhelming but those who can show a daily grasp of information and desire to learn will stand tall above others.
Likewise, traders that remain humble and display integrity are always highly valued. If you make a mistake in the trading world, you must own up to it and actively show a desire and plan to learn from it. Those who cannot remain integral with clients or other traders will also suffer. In trading, egos will halt progression.
- Senior Trader
Senior Traders are traders who have shown consistency in their trading ideas, have made successful trades, and have proven they are ready for the next step.
Senior traders are rewarded with much more freedom. They can develop their own trading strategies within the global markets. To do this senior traders must analyse markets, define their opportunities, implement strategies and risk manage effectively and safely as their strategy or trade matures. As well as technical skills, senior traders should also possess great communication skills and be prepared to uphold a mentoring position for junior traders and assistants.
Proprietary trading careers allow for faster progression than many other types of trading.
In prop trading it’s possible to be earning six figures by your third year, if you are very good. Putting the effort in to learn and develop will pay off, big time. In addition many individuals use their experience at a prop trading firm to land other trading jobs in the city. This is why it is such a competitive style of trading.
What other traders are there? Find out more in our guide to the Different Types of Traders.
Day in the Life
Watch one of Alphachain Academy’s traders explain the day to day lifestyle of a Proprietary Trader below:
For more Day in the Life stories, and for some firsthand experience of our trading programmes, check out what else our traders have to say here.
The one thing that every trader must possess is a trading strategy. A trader’s strategy can change, but each strategy is usually unique and it is what the trader will execute to be successful.
In proprietary trading, traders can apply strategies that include index, statistical, merger and volatility arbitrages and fundamental and technical analysis.
Below we’ve listed the four most common trading strategies that proprietary traders should learn inside and out.
Which trading strategies are commonly used?
Swing trading is a trading methodology that works by capturing a swing (also known as “one move”).
The idea is to prevent as much risk as possible by exiting trades before any opposing pressure sets in.
If executed successfully, it means traders will book their profits before the market reverses, potentially leaving them with naught.
Trend Following is a trading methodology that aims to capitalise on trends across the global markets whilst using risk management.
Trend following has a history of working so effectively because global markets tend to be driven by emotions like greed and fear.
When one emotion is in control, for example, greed, the market will automatically reflect the trend, and a Trend Following strategy can take capitalise on this event.
To develop a successful Trend Following strategy, it must answer these 7 questions:
- Which time frame are you trading in?
- How much will you be risking with each trade?
- Which global markets will you be trading in?
- What are your trading strategy’s conditions?
- Where will you enter your trade?
- Where will you exit your trade if you are wrong?
- Where will you exit if you are right?
A mean reversion trading strategy uses evaluated probability to bet that stock or instrument prices will revert back towards their average or mean.
An example of a mean reversion strategy would be buying a stock that has recently had an unusual fall in price.
If a stock has seen an unusually big drop, there’s usually a high probability that it will return to its normal level.
Traders can use technical indicators, fundamental analysis and economic indicators to identify opportunities to apply mean reversion strategies.
Algorithmic strategies involve inputting a traders criteria into a computer system that will then generate an algorithm and automate the trades. Algorithmic trading has the ability to generate profits at a higher speed and frequency because it is faster and more instantaneous than a manual input.
Strategies that can be used in algo-trading are:
- Trend-following strategies where traders identify trends in moving averages, channel breakouts, price movements and technical indicators.
- Mean reversion strategies
- Arbitrage strategies like market-making trades, where a trader buys a stock at a lower price in one market, and then sells it at a higher price in another.
Which assets are usually traded?
Trading assets refers to the collection of securities that a trading firm holds for the purpose of reselling for profit.
They can include an array of things including bonds, commodities and stocks. Commonly, the below are used in proprietary trading:
- Commodities like crude oil, copper, corn, gold and silver
- Cryptocurrencies like Bitcoin, Ethereum and Litecoin
- Equity Indices like Dow Jones, FTSE, NYSE and S&P
- Forex (FX) contracts like EUR/USD
It’s advisable that those wanting to become proprietary traders should study these assets and develop trading strategies and ideas around them.
“Secrets” To Success
There are no easy routes to success, nor any shortcuts. Some traders will work up to 18 hours a day, and when they’re not trading at work they’ll be at home tweaking their strategies or learning all they can.
So, if we could offer any trader advice that would guarantee them becoming the best trader possible, it would be these:
- Never stop learning
The best traders are always reading books, blogs or listening to Podcasts. They’re evaluating their trades, tweaking strategies and implementing new ideas based on their knowledge. When you make mistakes: Learn from those. Don’t let your ego get in the way of progression. Be open to new ideas, new methods and new educational experiences.
- Learn to separate emotions
Trades borne from emotion completely disregard the risk management strategies that are taught to traders to protect them from severe losses. Trade logically and intelligently, and don’t enter a trade if you have any type of feeling (excitement, greed, fear) attached to it. Instead, lay it out, analyse it and learn from it.
- Craft a Trading Journal
Arguably the most important point. We mentioned it in the interview section but that doesn’t mean that you should stop once you’re in a firm. A traders journal can become their bible. It’s a real time look at your progression, at what you’ve learnt, and what you can still learn. Sometimes when we hit a wall, seeing how far we’ve come can give us a boost of motivation and focus, so take it with you everywhere and never stop updating it.
- Speak with other traders
Joining a trading community can really increase your rate of growth, allowing you to get exposure to new ideas and trading strategies from others.
Things to Avoid
All traders will make mistakes — that’s part of the job. However, owning those mistakes and making an active decision to learn from it so you can be better next time is what separates good traders from great ones.
So on that note, here are the things we recommend avoiding:
- Taking trading personally
Trades should never be borne out of emotions, and likewise traders should never let emotions or egos cloud their judgement. Traders must be integral, honest and humble. Failing to be comfortable with any of the aforementioned could put you in a bad stead and lead to you making severe mistakes that could jeopardise your career and assets. When you enter the floor, leave your ego at the door!
- Going off hearsay
When you’re first starting out in trading, you might hear all sorts of trading advice. You might be reading a forum and come across a guy who is certain that the market is going to move this way or that. At the time, that can feel like exciting information and you could end up wanting to jump on that before anyone else. Don’t do this. If you hear a tidbit, memorise it, then evaluate and analyse it. Bad trades happen when there is no strategy, or evidence to support the idea. Wait until there’s evidence to support the claim and you’re comfortable with executing the trade.
- Holding on
If it’s becoming obvious that you’re holding onto a losing position, but you’re too worried to say, or you’re convinced the market will change – learn to let go. Holding onto losing positions can jeopardise your trading career, as can ignoring your stops. If it’s looking like losing territory, close your position once your price hits your stop. Get comfortable with admitting when you’re losing, and taking the necessary actions to combat it. These are great learning opportunities, if you let them be.
Proprietary Trading is a great place to either begin or advance your trading career. The benefits of Proprietary Trading speak for themselves:
- Quick reward and advancement: If you make trades that result in good money for your firm, you’ll quickly reap the financial benefits and advancements
- More accessible recruiting: Prop trading firms want someone passionate, with a desire to learn. Qualifications are important, but the field is more versatile than say, Investment Banking.
- Interesting work: Every day will be different, and every day there will be something new to learn and a new success to share.
- Good culture and lifestyle: Most Prop Firms are small which forges good friendships and teams as everyone is working toward the same goal with the same drive.
Whilst landing your dream position in a proprietary trading firm isn’t an easy task, new traders shouldn’t be dissuaded. Many proprietary traders begin as graduates on graduate schemes, and just need to show how committed they are to wanting to succeed as a trader.
If you keep working on your trading, creating new ideas and being curious enough to create new strategies, your desire will propel you to becoming a top proprietary market trader.
Now that you’ve followed the guide as to how to become a top proprietary trader, why don’t you challenge yourself to become one?
At Alphachain Academy we run a programme designed to allow prospective proprietary traders to become fully funded with us. The aim of the challenge is simple: Earn a funded trading account by showcasing your skill as a prop trader through a two-stage evaluation process.
If you succeed within 10 or 20 days, you’ll receive a funded trading account where you can keep 50% of all profits made. Test yourself today.
Alternatively, if you’re looking to get started in your proprietary trading career, at Alphachain Academy we run a variety of different trader programmes. From global trading, to algorithmic trading to cryptocurrency – we’ve got a course designed to suit your trading style. Whichever course you choose you’ll learn to trade on a CPD Accredited Programme, and start trading on a live $20,000 trading account.
Find out more by clicking the links below.