A prop firm is a company that provides traders (i.e. people who trade in financial markets) with the necessary capital, tools and resources to trade at their own risk (i.e. with the company’s own money), as opposed to trading on behalf of clients. Profits from the trades are usually divided between the trader and the company, with the latter receiving a percentage of the profits.
Prop companies usually have specific trading strategies and may specialize in particular markets or instruments. They can also provide training and mentoring programs for new traders to develop their skills and improve their profitability.
Advantages of Trading at a Prop Firm
One of the main benefits of trading with a prop firm is the ability to access more capital than would be possible with your own money. This can help increase potential profits as well as provide additional resources and support for trading. In addition, prop companies can provide reduced trading costs and access to advanced trading tools and technology.
The Risks Faced While Trading at a Prop Firm
It is important to note that trading at your own risk can be a high-risk activity, and traders may be exposed to significant losses. Therefore, traders must have a good understanding of the markets in which they trade, as well as risk management strategies to mitigate potential losses.
Unfortunately, like any other industry, there is a risk of fraud in prop trading. Some companies may promise potential traders big profits and access to a lot of capital but may use dishonest practices to defraud their clients.
Some examples of fraud in proprietary trading include:
- Misuse of client capital: Some prop companies may use client money for unauthorized trades or even for personal use.
- Deceptive terms: Some companies may promise low trading costs or favourable terms, but actually charge hidden or opaque fees.
- Misleading company information: Some companies may mislead clients about their reputation or size to attract more traders.
To avoid proprietary trading scams, it is advisable to research companies thoroughly before entering into a contract with them. This can include reading reviews from other traders, looking up a company’s information in regulators’ registries, and clarifying the terms of the contract before signing it. You should also avoid companies that offer terms that are too good to be true.
Using latency arbitrage to complete competition at a prop firm
Using latency arbitrage to pass the competition at a prop firm is an unacceptable practice and can lead to negative consequences. Prop firms typically use contests and tests to evaluate the skills and experience of potential traders and determine their suitability for employment with the firm.
The use of arbitrage, i.e. the use of price differences in different markets to guarantee profits, can violate contest rules and is an unacceptable practice. In addition, companies can use special tools and technology to detect such fraudulent attempts, and this can lead to the disqualification of participants.
It is also worth making sure that your trading activities comply with company rules and policies to avoid any misunderstandings or problems.
But, on the other hand, latency arbitrage is a guaranteed strategy for making profits without the high risk of losses. To avoid the risk of being disqualified we strongly recommend following the rules which we formulated based on the experience of our clients, who successfully completed the competition to a prop firm and even organized small groups offering help to other traders to complete the competition to a prop company.
Recommendations for using HFT Arbitrage Platform in prop trading.
We highly recommend using the HFT Arbitrage Platform with 2-legs latency 1 built-in arbitrage bot. This strategy uses the principle of hedging, or as they say, locking the position, and thus masks the latency arbitrage trade.
Hedging can be done in various ways but usually involves opening positions to buy and sell currency pairs simultaneously to mitigate potential losses from unexpected market movements. For example, if a trader opens a buy position on the Euro/Dollar, he may open a sell position on the same pair to mitigate risk.
Hedging in the 2-legs latency 1 strategy is done on a single account. In the settings of the program, you need to be careful with the settings of the following pairs:
- Min profit – how much profit the order should get (in points) for the system to start trailing on this position. We recommend making this parameter big enough, so a proprietary company can not attribute your strategy not only to arbitrage but also to scalping strategies.
- Hard S/L factor – this parameter will help you to set the real stop loss equal to the value of the virtual stop loss multiplied by the Hard S/L factor on all your positions, and thereby you will comply with the rule of most prop companies in need of a stop loss on all positions.
- Also, you should set up a Trade pause of at least 180 – for opening several orders in a row on a highly volatile market (for example, on the news) and a minimum order lifetime of at least 360 – to avoid closing the order too quickly.
It is also desirable to set the following pauses.
- Between closing locks – pause in sec between closing 1st lock and the 2d corresponding lock for the related instrument
- Between opening locks – pause in sec between opening 1st lock and the 2d corresponding lock for the related instrument.
- Between arbitrage orders – pause in sec between arbitrage orders.
For deeper masking of latency arbitrage trading, we strongly recommend using a special addon that simulates and randomizes various order sources and lot sizes.
Using copy trading to disguise arbitrage trading in prop companies.
Many traders also use trade copiers to mingle orders from other strategies, even if they are not profitable, into orders opened with a latency arbitrage strategy.
A Forex copy trading account is a way to automatically copy trades of other traders in the Forex market. The essence of this service is that experienced traders can share their trades with other traders who want to duplicate their success.
To use a Forex copying account, the trader must choose a signal provider, that is, an experienced trader whose trades he wants to copy. Then the trader opens his trading account and sets up a system to automatically copy trades of the signal provider.
Trades can be copied in real-time, which means that when the signal provider opens or closes a trade, that trade is automatically copied into the trader’s account. There are also options for copying trades with a delay when copying takes place sometime after the signal provider opens or closes the trade.
The main advantage of a copying forex account is the opportunity for novice traders to gain experience and knowledge from more experienced peers. In addition, copying trades can reduce the risks for traders who are not yet experienced enough to make independent trading decisions.
However, it is worth noting that a forex copying account does not guarantee profits. Traders should choose their signal provider carefully and set up a trade copying system to reduce the risks of potential losses. Traders should also have an understanding of how the forex market works and consider their own goals and risk level when choosing a forex copy account.
Trading at a prop firm
After competing in a prop firm using latency arbitrage, a trader can move on to stage two – trading in a prop firm using the same strategy
Trading at a prop firm (proprietary trading firm) implies that the trader trades in the financial markets on the prop firm’s account, using its capital rather than his or her own money. Traders typically receive a percentage of the profits they generate, and the rest goes to the proprietary firm’s income. This business model gives traders access to a lot of capital that they can use to trade the market, which can increase their profit potential.
Prop firms typically use a variety of trading strategies and may specialize in specific markets or instruments. Traders at prop firms often have access to advanced technology, software, and data analysis tools to help them improve their trading results.
However, trading at a prop firm can also be a high-risk activity, and traders must have a good understanding of the risks associated with trading in financial markets. Prop firms usually have rules and restrictions that traders must follow, as well as strict risk management rules. We recommend that you carefully review all of the rules and restrictions and customize your arbitrage trading program accordingly.
In general, trading in a proprietary firm can be an effective way for experienced traders to increase their potential earnings and gain access to more capital than would be possible with their funds.
However, to be successful in trading with a proprietary firm, traders must have a good understanding of the market, trading strategies, and risk management rules.
This article will help both beginners and experienced traders to pass the competition in a prop firm, and then successfully trade with prop funds. But I would like to note that unfortunately some proprietary companies intentionally slow down the order execution time and thus increase slippage. This approach allows you to sift out arbitrage and HFT traders. For this reason, traders should test various proprietary companies concerning order execution time to find acceptable “working” variants.