How does Prop Work?

Discussion in 'Prop Firms' started by FXNewb, May 22, 2007.

  1. FXNewb


    From what I know:

    - Trader puts up initial stake.
    - Prop supplies market access and, in some cases, training.
    - Prop supplies leverage

    Which party takes the risk of loss that exceeds the traders initial stake?

    For example. Say a trader puts up 5K at a prop shop. Trader is given 5:1 leverage, and with that 25K, proceeds to lose to 7K.

    Who takes that extra 2K loss?
    Trader or Prop firm?

    Seems in some cases the Trader bears the risk of loss over and above his initial capital contribution. Whereas, in other setups, the Prop will take the loss.
  2. cstfx


    In most (99.99%) of the cases, you will not be able to lose more than your contribution due to risk management of the prop. They monitor your activity, and if you approach a certain level wefore you blow out your deposit, you will be required to add more funds if you want to trade. Your positions will be liquidated by the firm. You will not be given the opportunity to lose more than you put in.
  3. FXNewb


    So prop offers extreme leverage and (maybe) informal training.

    If a traders stake is small to begin with, more leverage will break every money management rule in the book.

    And if the traders stake is decent, why bother trading Prop?

    I dont see the advantage here. Looks like they're enticing newbs to blow their account in double quick time with big leverage.

    The Prop gets a piece off the loosers via commish. And then they turn around and take half of the winners earnings without putting up much risk at all.

    What am I missing?
  4. SDticks


    The situation described is not a real prop firm but a leveraged retail firm. In a true prop situation the trader makes no initial contribution and the firm takes all of the losses.
  5. FXNewb


    Do many True Prop Firms even exist?

    Seems most prop shops nowadays are as you say - leveraged retail firms.
  6. SDticks


    Yes they exist. Mostly in Chicago, but some elsewhere. Not as plentiful as leveraged retail.
  7. Bonpara


    True prop firms do exist. although this will open a can of worms. swift trade is a great firm for beginners is your out side of the USA
  8. Before retail trader "prop" really existed. Cutting your teeth and trading their money for a cut. This was in the early to mid 90's. Glory days.....
  9. FXNewb


    Yea, Im in Toronto (canada).

    A few people have mentioned Swift. Are they true prop - will they take a traders losses over and above his initial capital outlay?

    Or what?
  10. you would have to be a terrible trader to lose 7K using 25K in buying power on one trade.

    if you keep losing on individual trades, they will normally cut off your account once your losses equal your cap contribution.

    but if somehow you instantly lost like 50% on a single trade and blew out your account and then some, the prop company normally will eat it and show you straight to the door or ask for more money (including the excess losses). if the losses are huge, i guess they could sue you but normally it isnt worth their time and legal costs.
    #10     May 22, 2007