Prop Trading vs Traditional Trading: What’s the Difference?

Understanding Prop Trading vs Traditional Trading is critical for traders to decide which way to go and which one has lower risk. You have likely heard about retail trading, where individual traders select an asset class and invest their own capital in the instrument through brokers. Then, those invested traders monitor the gains and losses in the market. Either they book profits or incur losses. Traditional trading is similar to retail trading, where you trade via a broker over the phone or in person. Now, individual traders can execute Retail trading online, as all brokers have transitioned to digital. But, in prop trading, there is no scope for trading using a phone or in person. It is strictly online and, more importantly, on the prop firm’s own platform with its own capital. 

Prop trading vs personal trading may have similar asset classes. Both have the same goal: to earn profits for themselves and traders. But they operate on a different framework and structure. The main difference is the source of funding for the trade, who is funding the trade. Is it you or the firm? Is it your money or the firm’s money? Who invests, you or the firm? Whose money is it anyway? If you know this, you know 50% of the difference between traditional trading and prop trading. This blog attempts to differentiate prop trading vs traditional trading in detail. We will compare them until you say “enough.”.

Understanding Prop Trading

In Proprietary Trading, the trader uses a firm’s capital instead of risking their own money - the trader must pass an evaluation stage or a multi-step challenge. Upon successful completion, they get the firm’s capital to trade on a simulated platform. It is called the funded stage.

Prop Trading - Key features

• Capital invested belongs to the firm and not you.
• You pay the challenge or the evaluation fee, or the account activation fee. That is the only investment that you risk.
• Firms implement predefined risk management rules that traders must adhere to, including drawdowns, profit targets, consistency, news restrictions and EA restrictions.
• Most firms offer high profit splits, which is the profit share between the firm and the trader, typically 70% to 90%. In this arrangement, the trader keeps the lion's share the remaining proceeds go to the firm.
• Most prop firms offer scaling options that significantly boost the account size.  You can apply for scaling based on your performance, consistency and the time you have spent on the platform.

Understanding Traditional Trading

In Traditional trading, most individual traders rely on their own capital to trade. A trader uses their own funds and invests them through a broker. Because it all traders’ money,  they get to keep all the profits and bear all the losses. The trading outcomes and consequences affect only the trader. They belong solely to the trader.

Traditional Trading - Key features

• Money at stake is yours (individual trader)
• Individual traders trade rule-free, with no obedience to any rules or restrictions. They enjoy complete freedom.
• Since it is all your money, you get to keep the entire 100% of your profit and also bear 100% of the losses.
• Risk is not shared and it belongs to you fully.
• Traditional trading allows for direct entry with no evaluation or challenge stage, no test and no fees (your broker may take a joining or account activation fee).

Prop Trading vs Traditional Trading — Comparison Table

Main Differences of Prop Trading vs Traditional Trading Explained

Capital & Risk

Prop Trading:  You can start with a small capital. You pay the one-time challenge fee, which is the only capital risk. Maximum risk lies with the firm.

Traditional Trading: The entire risk is yours because you invest your own money.  If you lose, you lose your capital.
 

Profit Sharing

The profit share of the prop firm is generally high, ranging from 70% to 100%.

No profit sharing. The entire profit belongs to the trader. Traditional trading allows traders to enjoy what they earn.

 

Trading Rules

Prop firms have extensive rules that traders need to follow strictly. Any breach of rules may result in account closure. Typical prop firm rules include daily drawdown limits, overall loss limits, profit targets, trading rules and restrictions, such as news event restrictions, the use of EAs, algorithmic trading, grid and martingale and maximum lot size restrictions

Traditional trading has more freedom, with no rules. You may be required to maintain the broker margin.

Skill Requirements

Prop trading is primarily for skilled and experienced traders, as they must undergo the challenge or the evaluation stages to prove discipline and risk management.
Traditional trading has an evaluation. Traders must be confident in their skills and strategies from the start, as the risk of losing money is high.

Best Choice - Prop Firm Trading vs Traditional Trading

Prop firm trading is more suitable:

• When you don't have large capital or do not want to use your own capital
• Want to trade with a larger account size and position size without investing your own capital
• When you do not want to take the maximum risk and prefer a lower own risk
• When you need predefined rules and structure, a clear path and goals
• When you want a scaling option quickly and trade on a much larger account size

Traditional Trading is more suitable:

• When you are an experienced trader and a  consistent profit earner, you can invest a large amount of capital and take larger risks
• When you want to have full freedom to trade in your own way without being bound by imposed rules and restrictions
• When you are looking for a long-term investment horizon, allow your investment to grow over time by staying invested
• When you do not want to share any profits with others and want to retain 100% unconditionally with you.

How to Start Prop Trading?

Funded Nation, the newest addition in the prop trading space, offers a simple one-step challenge to start prop trading instantly. They also provide Instant Pro and Instant Lite funded accounts, which allow you to start prop trading instantly, with account sizes ranging from $5K to $100k. The trader can opt for the scaling option. The account fee is low, starting at $45 for a challenge account. For an instant account size of $5000, you pay only $55. Your own capital risk is limited to the account fee you pay.

You can skip the challenge and directly purchase the Instant Lite if you want to start small and grow, or the Instant Lite if you prefer high profits, fewer rules and on-demand payouts. Funded Nation offers support throughout your prop trading journey. You can leverage Funded Nation's strong educational resources and communities to learn from. 

Final Verdict

You can choose between traditional trading and prop firm trading based on your preference and style. Prop trading is perfect for those who want to start with low risk and trade large accounts. Traditional trading is ideal for experienced traders who are skilled and profitable, invest their own capital and retain the entire profit with themselves. Traditional trading is the conventional trading method for those who want freedom to trade on their own terms.  Prop trading firms fund your trades, enabling you to earn profits for both parties, fostering mutual growth. Select your path and if you wish to try legit prop trading, you can sign up on Funded Nation and start prop trading without risking your own capital.