By Nathan Boardman
In proprietary trading, also known as “prop trading,” skilled traders utilize the capital provided by a firm to carry out trades, resulting in shared profits between the trader and the firm. By utilizing prop trading, individuals can generate profits from market returns without relying on their capital. However, there are certain distinctions when compared to the role of a day trader.
Achieving success as a prop trader, though, does come with its fair share of obstacles. Prop traders must complete a prop trading challenge in order to gain access to trading-funded accounts. It is believed that only a tiny percentage of the traders who undertake the challenge actually succeed.
What exactly is a Prop Trading Test or Challenge?
A prop trading test (or challenge) is an assessment in which a trader must demonstrate their aptitude and abilities to trade the funds provided by a proprietary firm. Various prop trading firms have different criteria for their assessments, with certain firms mandating traders to complete multiple phases before they become eligible for a funded account. Certain companies may also provide a trial or simulated account for individuals to engage in trading without any risk.
Are these tests difficult to succeed in? Absolutely. These challenges are created to evaluate a trader’s abilities and reliability comprehensively. In order to achieve success, it is imperative to possess a firm grasp of various trading techniques and the art of effectively managing risks. Nevertheless, by adequately preparing, you can significantly enhance your likelihood of successfully overcoming the challenge.
Getting Ready for a Proprietary Trading Firm Testing
If you are truly committed to pursuing a career as a prop trader, it is essential to excel in the prop firm test. Given that this is an assessment of your trading prowess, you are anticipated to employ top-notch trading tactics and consistently secure profitable trades.
If you want to improve your chances of successfully passing the prop trading test, here are a few key areas to concentrate on:
- Strategy and analysis – Technical analysis is widely considered to be the most essential tool for a trader. Understanding how to analyze and interpret an asset’s price chart, along with applying the appropriate technical indicators, is crucial for predicting short-term price movements. By incorporating moving averages, Relative Strength Index (RSI), and Bollinger bands, traders can gain valuable insights into market volatility and effectively respond to it. In addition, it is crucial not to overlook the importance of fundamental analysis. This type of analysis can offer valuable insights and a deeper understanding of an asset’s behavior, ultimately revealing potential trading opportunities in the future. Â
- Mastery of emotions—Proper trading requires a high level of self-control and calmness. Markets can sometimes display unexpected behaviors, so it’s crucial to develop practical emotional management skills when things don’t go as planned. Please exercise caution when succumbing to pressure, as it may result in a cascade of unwise choices.
- Risk management is an essential aspect of trading in financial markets, as it is inevitable to encounter a certain level of risk. The important thing is to concentrate on avoiding significant losses by adhering to a robust risk management plan. When using leverage, it’s essential to exercise caution and remember that it can amplify both potential gains and losses. Achieving long-term success in proprietary trading relies heavily on implementing efficient risk management strategies and possessing a comprehensive knowledge of the various tools and resources available to you. Â
To ensure that you are well prepared before participating in the challenge simulation, you should familiarize yourself with the trading variables, goals, and regulations of the prop company. Make use of this knowledge to recreate the challenge on a demo account with the intention of increasing your profitability while taking into consideration all relevant elements in a comprehensive manner.
Tips for Successfully Completing the Prop Trading Test
If you have adequately prepared and are confident in your abilities, all you require to achieve success is discipline and a comprehensive trading strategy. Maintaining a steady and unwavering approach is crucial. Make sure to utilize suitable risk management techniques as well. Being adept at handling and bouncing back from setbacks can significantly impact your success in overcoming challenges.
With that being stated, there are techniques that professional traders can explore to reduce risk and promote satisfactory profits, like scalping and arbitrage. By incorporating these approaches alongside sophisticated trading instruments, traders can effectively navigate the market and mitigate potential losses. Here are some techniques to assist traders in successfully navigating the prop challenge:
Strategy 1: Pairs trading
Morgan Stanley was the first company to launch pair trading in the 1980s, and since then, it has gradually acquired appeal among more experienced traders. The approach involves trading pairs of closely tied assets to achieve market-neutral gains.
If the link between the two assets becomes less intense, the trader can choose to purchase the asset that is not performing well or sell the one that is performing well. Whenever the correlation is reestablished, the trader can enjoy the benefits of holding both positions.
To excel at the pairs strategy, one must possess the skill to pinpoint appropriate asset pairs that exhibit a robust statistical correlation of at least 0.80. Although traders can consult past data to identify these pairs, there is no guarantee that the correlation will hold in future price movements.
Strategy 2: Arbitrage
Arbitrage involves taking advantage of market inconsistencies to generate profits. These opportunities present themselves when there is a disparity in the value of an asset across various markets. Given the minor differences, arbitrage trades result in less significant gains. On the flip side, this also implies that the level of risk is reduced.
Prop traders rely on bots and market-watching tools to quickly identify and seize arbitrage opportunities before they disappear. Nevertheless, specific prop challenges may prohibit the utilization of trading bots, so it is advisable to verify that employing bots will not lead to disqualification.
Index arbitrage and volatility arbitrage are two well-known strategies in the field of arbitrage. Index arbitrage aims to capitalize on the differences between ETFs or futures and the stocks they are based on. Volatility arbitrage focuses on finding differences between implied volatility and actual volatility in the options market.
Strategy 3: Trading in Brief Intervals
Short-interval trading strategies, such as scalping and day trading, are viral among prop traders who have achieved success. The concept is to take advantage of price fluctuations that naturally occur in the markets and execute numerous trades during the day, ranging from a few seconds to a few hours each. Traders aim to capitalize on small price fluctuations and achieve multiple successful trades throughout the trading day.
The approach requires accurate timing, rapid decision-making, and the use of sophisticated trading instruments. This trading strategy is highly cutthroat and demanding, necessitating meticulous risk management and unwavering execution to minimize losses.
Strategy 4: Strategy for Initiating Orders
In this prop trading strategy, the concept is to align our trades with those of the New York Stock Exchange (NYSE) specialist at the market’s opening.
Given that the NYSE specialist’s role involves ensuring a well-regulated market by pairing buy and sell orders, it is reasonable to infer that their actions are indicative of their evaluation of market sentiment and potential price fluctuations.
Therefore, proprietary traders synchronize their actions with those of the specialist, aiming to take advantage of the expected market movement at the start of trading.
Conclusion
In the event that you have developed your talent and have achieved mastery in risk management, you may consider yourself prepared to take a test in prop trading. The factors that guarantee success include the capacity to maintain emotional stability, self-control, the ability to handle risks, and the desire to learn over time.
