Prop Trading Strategies

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Contributor, Benzinga
February 15, 2024

The best prop trading strategies include trading the news, trend following and strategic trading intervals. Start prop trading with Apex Trader Funding!

Proprietary trading, commonly known as "prop trading," is a form of trading where financial institutions and banks trade on their own account rather than on behalf of clients. Prop trading strategies are employed by these institutions to generate profits through speculative trades using their own capital. These strategies are designed to take advantage of short-term market inefficiencies and price discrepancies to maximize profits.

Prop trading strategies require expertise, quick decision-making, and risk management skills, making prop trading an exciting and challenging sector within the finance industry.

The Best Prop Trading Strategies

The prop trading market has exploded with the rise of new technology, which makes it a readily available endeavor for many people. Because it’s such a competitive field with a person’s compensation directly related to their performance, care must be taken to ensure trading is done in the most effective way.

The most successful prop traders employ one, some or all of the following major proprietary trading strategies to earn a profit after getting funded. These strategies take time to master, and even when run perfectly, will not guarantee a positive return. However, these common strategies can help you explore the prop trading sphere.

Let’s dive in and discuss a few of the top prop trading strategies used today.

1. News Trading

Evidenced by the worldwide upheaval of the economy due to COVID-19, it’s easy to see that newsworthy events can shake up the stock market. While many news events aren’t this impactful, some trading strategies examine newsworthy events to inform the decision about when to buy or sell related assets.

Most traders follow financial news or use native news feeds like Benzinga Pro to speculate on which direction a company’s stock might take in the short term. Public companies are required to release quarterly earnings reports, and these reports can often cause large fluctuations in the company’s stock based on if they exceed or fall short of projections.

On a more macro level, changes in monetary policy made by the Fed or interest rate adjustments can signal it’s time to buy or sell certain stocks. Data on the economy as a whole is also news that can dictate trading activity, such as unemployment rates, changes in the consumer price index, GDP data and more overall market data. A trader must carefully analyze all this information before making any trade decisions.

2. Trend Following

Considered the most intuitive prop trading strategy, trend following involves examining the historical performance of a stock, industry or index as a whole and then using established trends to make trade decisions on buying and selling in the current environment.

Using trend following as a strategy involves setting benchmarks for entry and exit points in a stock trade. These points are usually based on a percentage growth or decline in the stock price, which has historically signaled that the stock will rise or fall over the upcoming trading sessions. When buying based on trend following, you’ll see a significant change as a flag to buy, with another predetermined change threshold to sell.

Traders who use trend following often tailor their strategy to meet their own benchmarks and can use the help of technology to identify trends and know when to buy or sell. Note that this strategy is often more volatile, so you may need to set more conservative benchmarks to stay within the rules of your proprietary trading firm.

3. Strategic Trading Intervals

Some of the most popular prop trading strategies revolve around the amount of time the trader intends to hold the stock. From holding stocks for just minutes to keeping the same trade for weeks or months, here are a few different intervals and a little background on why a trader might use each.

  • Scalping: Scalping is done on a minute-to-minute basis, with no trades being held overnight. A trader using the scalping strategy is constantly evaluating a stock’s performance and has positions set within a stock to buy and sell it, sometimes numerous times throughout the same day, with the goal of capitalizing on the real-time fluctuations in the market.
  • Day Trading: Day traders hold assets for a longer period of time than scalpers, with the goal of selling the stock before the end of each trading day. This means that day traders might sell a stock after only a few minutes or multiple hours. Day traders, like scalpers, must have ideal timing on their trades in order to be profitable.
  • Swing Trading: Swing traders hold stocks longer still, for a period of several days to weeks, with the goal of riding a wave of positive activity and then exiting when the positive trend ends. Swing traders ideally will exit a stock as it heads down and then jump back in over and over to maximize their profits.
  • Position Trading: The longest-held stocks purchased by a prop trader, position trades can be held for months or even years. While there is generally less profit to be made in position trading, traders who use this strategy are betting on a positive trendline over time to generate a return. While this strategy is more conservative, there is less risk of overall loss from the longer timeline.

Benefits of Employing Prop Trading Strategies

Whether they are using advanced historical data, mining news articles for stock-impacting tidbits or constantly monitoring real-time market fluctuations, successful prop traders have some kind of strategy in place.

Even though you’re using someone else’s money in proprietary trading, it’s still important to be careful. Most of the time there is a high barrier to entry to become a prop trader — and if you aren’t profitable, you will soon be out of a job. The following are some of the benefits that come with outlining your strategy and putting one of the trading strategies above into place.

  • Data-driven Approach: Using a well-defined strategy when trading, even when trading the news, allows a trader to reduce the use of emotion in making trading decisions. If you have no strategy in place, you’re more likely to make a decision on impulse or emotion, which is not a recipe for long-term success.
  • Credibility: You can follow several paths to become a prop trader, but most involve a trial period or a personal interview. If you have to go through an interview process, having a strategy you can clearly define helps you establish credibility as an experienced trader.
  • Track Record: There is a reason these strategies are well-documented and used by successful traders. Using a defined trading strategy that has a track record of success is more likely to improve your chances of making profitable trades.

Drawbacks of Prop Trading

When considering a career as a prop trader, it’s important to consider the benefits and drawbacks. Even if you have a track record of success and great strategies in place, prop trading carries risks related to the fact that you’re trading with someone else’s funds under contract.

  • Lack of Regulation: Proprietary trading firms that aren’t also operating as broker-dealers may not be regulated or overseen by the U.S. Securities and Exchange Commission (SEC). Taking the lion’s share of profits, bogus initial fees and failure to pay out or theft of funds are all risks in this industry, so it’s crucial to research the firm and ensure it has a positive reputation before getting involved.
  • Barriers to Entry: To begin prop trading, you might need to pay a deposit and keep current with high monthly fees. If you’re a successful trader this typically isn’t an issue because you can cover these expenses easily. However, if you’re just starting out, you could quickly find yourself losing money or out of a job.
  • Lack of Freedom: Most firms will limit the type, duration or amount of transactions you can make, which keeps some traders from maximizing their profitability.

Compare Prop Trading Firms

Choosing a reliable and reputable prop trading firm is essential. Benzinga offers insights and reviews on the following proprietary trading firms. You may want to consider continuing your search for the right prop trading firm with a few of the links below. 

Try Global Trading Software

Global Trading Software works well for prop traders. In fact, the platform was designed with prop traders like you in mind. You can complete technical analyses of the assets you’re selecting and use the strategy that works best for you. Because prop trading firms often allow you to say trade, scalp, etc, you can use GTS to get the data that will make your life easier. You can also connect to MT4 and TradingView as needed. Some traders might even connect to a platform like NinjaTrader as the need arises.

Frequently Asked Questions

Q

Can you make a living with prop trading?

A

Many people can make a great living by prop trading, especially if they employ effective trading strategies and are comfortable working within their firm’s guidelines.

Q

Is prop trading safe?

A

Since proprietary trading is largely unregulated, there are instances where prop trading is unsafe. If you would like to be a prop trader, it’s essential that you research a potential firm and ensure it has a positive reputation before applying.

Q

Which prop trading strategy is right for me?

A
The right prop trading strategy depends on your individual skills, personality traits, and trading goals. It’s important to thoroughly research and understand the different strategies available and seek advice from experienced prop traders or professionals in the field. Experimenting with different strategies and gradually refining your approach can help find the strategy that best suits your strengths and preferences.

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.