Standard trading vs modern prop trading - which is right for you? (2024)

Academy News Standard trading vs modern prop trading - which is right for you?

Published:24.11.2023

What is behind the increasing popularity of modern prop trading?

Modern prop trading has become popular in the last few years, mainly because traders are attracted by the prospect of trading on large-capital accounts that often exceed tens of thousands of euros or even more - capital that most beginner and advanced traders would not normally be able to reach. Although these accounts are owned by prop trading companies, some of the profits go into the traders' pockets.

This all sounds very appealing, so where is the catch?

The steep road to a funded trading account

The lures described above must seem almost irresistible to any trader. However, we have still yet not mentioned one important part of how modern prop trading firms operate their business. That is the fact that anyone interested in a funded trading account must complete the paid trading challenge and prove that they can generate steady profits while keeping drawdown within reasonable limits. These challenges sometimes have several rounds and are even time-limited. The vision of trading on large accounts thus becomes a bit more hazy.

However, if candidates manage to complete the evaluation phase, they might not be out of the woods yet. Prop trading firms don't let just anyone into their accounts, so traders have to watch the drawdown even when trading outside the evaluation phase. After all, there is still the possibility of losing a funded trading account. All you have to do is make a few above-average losing trades due to adverse market conditions (the tolerable drawdown limit is often around 5%) and your account is taken away. If you want to get it back, you have to go through a paid evaluation phase again.

Risk management is a very crucial aspect of trading and every trader should be able to keep his/her losses within certain acceptable limits. This is especially true in prop trading. However, if you manage to do this while generating a steady profit, a regular payout is waiting for you. But again, you cannot count on withdrawing entire profits. This is because you share them in a certain ratio with the prop trading firm.

Modern prop trading vs standard trading - which is right for you?

Now that we've summarized the main advantages and pitfalls of modern prop trading, let's compare the industry with standard trading.

Advantages of standard trading

Greater trading freedom

With standard trading, you trade with your own money and are your own boss. No one tells you how much your maximum drawdown can be or what profits you must generate this month. Trading is completely in your own hands and if there are losing days (and there usually are), no one will take your account away from you.

The money is yours

Although the amounts offered by prop trading firms for trading can often reach millions of euros, they are still someone else's property. One from which you can only make a portion of the profits. In standard trading, you trade with your own money, and each profit gradually builds up your assets. Over time, you can build up a decent amount of capital yourself, which you are free to withdraw and reinvest in full at any time.

Freestyle Trading

As we have already mentioned, prop trading firms have a fixed drawdown level that traders should not reach. However, other firms also have restrictions on the number of trades made in a certain period. This is a condition that makes it impossible for slower trading styles such as swing or position trading. With standard trading, you don't face this.

A significant drop in the account equity does not mean the end

Benefits of modern prop trading

Almost instant access to money

Building a trading account can be a lengthy process that may not be to everyone's liking. Modern prop trading firms thus offer their product to speed up the process of building a trading account. You can skip this process altogether (if you pass the evaluation phase) and trade with more capital.

Learning healthy habits

As we've already mentioned, the terms and conditions of prop trading companies place fairly strict demands on traders' risk management - and that's a good thing. In fact, a significant number of beginner traders lose all their money in standard trading due to irresponsible trading. The high standards set by prop trading companies can thus act as an education in responsible trading.

So trading mode to choose?

Prop trading is certainly interesting proof that the online trading industry is not standing still and is evolving. This is good news for all traders regardless of their preferred trading method. Healthy competition is forcing brokers to offer more interesting conditions and take better care of their clients.

Prop trading can thus be a good option, especially for novice traders who are interested in trying out whether they are up to the challenge and then trading on really big accounts. After all, the very act of completing these challenges or trading on a funded account is set up to teach traders sound principles of responsible trading.

If, however, you prefer to build your own account with as much freedom as possible, often at the cost of trading from smaller positions but with a view to progressing towards larger positions, then standard trading is more suitable for you.

However, we at Purple Trading certainly do not see prop trading as a competition to the standard form of trading, but rather as an extension of the services offered in the online trading industry.