Forex Trading: Should You Leverage Prop Trading or Go It Solo?

With the proliferation of open banking, APIs, and online trading solutions, it’s become easier than ever to make your money work for you. Robo-advisors, investment platforms and more are making it possible for the average Joe to get involved in the exciting (and potentially profitable) stock and forex markets.

But just because the market has lots of attractive options, doesn’t mean you should jump at the first opportunity that arises. Aside from the obligatory scam alert disclaimer I must make, you will also need to do your homework on which investment tool you will want to leverage.

When it comes to the trading of foreign currencies, plenty of platforms have popped up over the past couple of decades to enable efficient and real-time Forex transactions for retail investors. However, in the past decade or so, we’ve also witnessed a resurgence in the popularity of proprietary (prop) trading firms, perhaps on the back of the massive success of as-a-Service (aaS) and subscription business models.

So, what’s the difference, and how can you decide which trading method is ideal for you?

What is Prop Trading?

So, the basics: there are a few differences between trading foreign currencies with a prop trader firm as opposed to going it alone and investing via a broker.

With a prop trader firm, you are either charged a monthly subscription fee or a larger, fixed one-time fee, often serving as your ‘risk contribution,’ a safety deposit of sorts that will be used to cover any losses you make for the company. In exchange, you are allocated capital belonging to the prop firm for you to manage and invest. The goal here is for the company to put its funds to work by outsourcing the work to third parties, where the trader doing the actual work keeps a majority of the trade profits (usually between 75% and 90%) and the company takes the rest of the earnings.

For the trader, this seems attractive because they are able to invest relatively large sums of capital that they likely would have never been able to acquire or invest on their own, and reap equally high returns. While managing such massive sums of money might seem daunting, prop trader firms usually offer learning materials and lessons by experienced coaches on investing best practices and skills, so that you are able to invest as efficiently and knowledgeably as possible, for their sake and yours. They will also often have online traders available to support you when needed with advice and guidance.

Forex Retail Trading Via Broker

On the other hand, when you are trading on your own through a broker, you are more independent, with full 100% control of all your funds, decisions, strategies and profits. The capital you own is what you can invest, and any losses you make will come out of your own pocket. However, for those that are willing to do the work and build an understanding of their preferred currency pairs and the factors governing their value, the potential for returns is great, afforded by a great degree of flexibility. The downsides are that you will have to contend with broker commission fees and market volatility (which is a curse, but also a blessing in disguise).

Prop Trading vs. Retail Trading

Naturally, both have their positives and negatives, but I tend to generally steer away from prop trading. Let me explain.

While there is some bias in my answer since I am an experienced businessman and investor, I would still advise against taking the easy way out with prop trading firms, even if you have the necessary trading experience. As the hit TV show The Boys puts it, “You don’t [mess] with the money (expletive removed).”

When you sign up with a prop trader, you are handling someone else’s money. Even after they vet you and inspect your qualifications and trading history, there are tons of strings attached (did someone say surprise fees?) to that lump of capital you will be assigned. Not only will you have to pay a ‘risk contribution’ (basically collateral, and often sizeable) in terms of a subscription or one-time fee for the ability to trade using their funds and to cover any losses you cost the firm, you will be assigned rules to follow and targets to hit if you want to keep working with them and not lose your deposited money. Prepare to familiarize yourself with terms like Profit Targets, Consistency Targets, Daily Loss Limits and Maximum Loss Limits.

But that’s not all. Generally, it’s much riskier to trade with a prop firm than it is to trade with a traditional broker, as they typically don’t have the same regulatory protections in place that traditional brokers do. At best, they might be unintentionally behind on regulatory compliance. At worst, they might be intentionally fraudulent.

Then there’s the risk of them going broke at any time, due to a lesser degree of checks and balances in place. For the final cherry on the cake, it is commonly known that before they sign you on, some prop firms will require you to sign away your rights to sue them if you are unhappy with the way your account is managed.

With all this in mind, I can’t in good conscience recommend prop trading. If you’re still intent on doing so, then make sure you carefully read the fine print, and consider your personal circumstances and whether you’re willing to take the risk. Generally, I would still advise taking the retail trading route. It’s safer, more transparent, and ultimately more rewarding — if you’re willing to put in the work, of course.