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Prop Trading Vs Retail Trading

In recent years, some retail traders have stepped away from forex brokers and have become investors for prop trading firms.

Prop trading arguably offers more growth potential than traditional investing and traders assume less risk. With retail trading, investors risk their own capital. Retail traders also need to decide whether to withdraw funds or grow their account. With prop trading, both happen simultaneously.

The business model of a prop trading firm is to generate profits. If a prop trader makes a profit, the firm will provide them with more capital. Prop firms want to attract talented traders to optimise their earning potential whereas brokerages earn from traders’ commission or P&L.

The trading environment at prop firms can help nurture beginners, providing education as well as the opportunity to become established professionals. Retail brokers simply give traders access to the market and care less about individual results.

By working for a prop shop, traders can earn a reliable and steady salary. A prop firm will typically pay its traders based on a profit split commission plan where the trader and the firm share the outcome of the individual’s performance.

In most prop companies, the trading platforms used are exclusively in-house and can only be used by the firm’s traders. The firms, and subsequently its traders, gain a huge advantage from owning the software, something that retail traders cannot typically access. With that said, retail traders are increasingly accessing more technically advanced platforms on broker websites.

Prop trading houses tend to be more competitively priced than retail brokers with per-share fees that decrease as volumes increase. The firms may also charge software or desk fees.

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