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Best alternatives to proprietary trading

Best alternatives to proprietary trading

Written by

Justin Cox

Written on

Mar, 2024

Updated on

Mar, 2024

Table of content

Proprietary trading, commonly referred to as prop trading, is a type of trading where financial institutions use their own funds to participate in the financial markets. Prop firms use trading challenges and competitions to evaluate talented individuals and provide them with funded accounts. Profits are split between traders and prop firms with predetermined ratios. Prop trading is a great way for talented traders with low capital to get funded and manage large sums of money, however, funded accounts come with many limitations. Prop firms generally have low maximum available leverage, and strict rules that protect the company’s funds from risks. It is not easy for most traders to successfully complete trading challenges and get funded accounts. Luckily, there are many alternatives such as demo trading, No Deposit Bonus trading, live trading, and social trading. Let’s discuss each alternative in more detail.

Demo Trading

prop trading demo

Demo trading, also known as paper trading, comes with multiple benefits. The trading environment is fully simulated and traders have zero risks when they demo trade various instruments such as shares, currency pairs, cryptocurrencies, indices and commodities. Some of the main benefits that demo accounts offer includes:

  • Risk-free learning opportunities: since actual money is not involved, traders can experience markets, learn how to use trading platforms and place orders without a fear of losing money.
  • Building and testing trading strategies: demo accounts are actively utilized by both beginner and seasoned traders for building and upgrading their trading strategies. Market conditions often change and to cope with changing market environments, it’s crucial for traders to constantly search for more efficient ways of making money.
  • Psychological preparation: while it’s true that demo accounts can never be as effective as live trading when it comes to developing a trader’s psychology, they still play a huge role. Live trading is best for experiencing and overcoming human emotions such as greed, fear of placing an order, and desire to revenge trade after losing trades. Demo accounts help traders to gain confidence in their trading strategies and follow them thoroughly. No matter how good a trading strategy is, every strategy experiences drawdown periods. When traders do not trust their systems, they tend to dump their strategies during the account drawdown periods, and search for a new strategy.
  • Platform familiarization: modern trading platforms are user-friendly and easy to use, however, some of their features take more time to master, such as how to use trading indicators. It’s important for traders to fully understand their trading platforms before going live to avoid losing money due to a simple, technical mistake that can be prevented easily by spending more time on the demo.

Most highly reputable Forex brokers such as Pepperstone, FP Markets, HF Markets, and others provide traders with demo accounts free of any charge.

No Deposit Bonus Trading

Some Forex and CFD (Contracts for Difference) brokers offer No Deposit Bonus trading to their clients to attract more traders. The bonus is often given to new traders that do not have trading accounts with the brokers yet. In exchange for opening trading accounts, traders receive a certain amount of funds in their trading account without having to make an initial deposit.

Many reputable brokers offer No Deposit Bonuses as a welcome bonus to new traders. One notable example is XM. The broker offers a 30 USD bonus to new clients. Profits generated from trading using the bonus are withdrawable. Moreover, traders can also withdraw the bonus, however, specific trading requirements need to be met. Traders are required to reach at least 10 micro lots (0.1 standard lot), and make at least 5 round turn trades to be permitted to withdraw the funds.

It’s important for traders to read terms and conditions thoroughly before opening live trading accounts to claim their bonuses. Many No Deposit Bonuses are non-withdrawable, and many require a certain amount of trading turnout to become withdrawable. The limitation on withdrawals ensures brokers that traders are not abusing the bonus and are actually trading.

Prior to registering with a broker, it’s best to check how to claim the promotion with customer support agents. Some bonuses might be linked to certain trading account types. In addition, there might be limitations on available assets that you can buy with the bonuses.

No deposit bonuses are a great way to participate in the markets for traders with short on capital, however, it should be mentioned that there are many dangers. Most scam brokers offer various promotions, including high no deposit bonuses, to catch the attention of traders. To avoid money traps and scams, it’s important to check your broker’s license. Licenses need to be issued by reputable financial institutions such as CySEC (Cyprus Securities and Exchange Commission), ASIC (Australian Securities and Investments Commission), FCA (Financial Conduct Authority) in the UK, etc.

One more danger of using no deposit bonuses is that traders may shift their focus on meeting trading volume requirements instead of finding the best trading opportunities. Success comes when traders chase excellence and not when traders are chasing money. When using no deposit bonuses, traders need to make sure their trading skills are not being changed long term.

Social Trading

Social trading is another great alternative to prop trading. This type of trading allows traders and investors to replicate trading from professional traders, exchange trading ideas and market knowledge. One form of social trading is copy trading, where traders automatically mimic trading decisions of signal providers that are successful in the markets. Many brokers have well-developed social trading platforms that make signal provider selection easier. Traders can use smart filters to find successful trades based on their overall performance, asset type, risk tolerance, win rate, etc.

Copy trading platforms are typically consumed by traders that wish to participate in financial markets, but lack necessary experience or don’t have time to spend on active trading. In addition, copy trading provides traders with the opportunity to invest in various traders and diversify their trading risks. Furthermore, copy trading offers a career opportunity for professional traders that wish to sell their signals and expertise and get an additional income from financial markets.

As a downside, while social trading platforms are highly beneficial for beginners, sticking to copy trading for long can limit traders’ learning opportunities. In addition, traders that use copy trading services might end up overly dependent on their signal providers. Moreover, it should be mentioned that copying from successful traders doesn’t equal guaranteed profits. Past performance doesn’t always translate into future results, and it’s important to consider these risk factors if you decide to copy-trade.

Most brokers provide traders with trading platforms that support copy trading, however, a very limited number of brokers have proper infrastructure ready for true social trading experience. One example is AvaTrade, which offers AvaSocial platform with extensive social trading capabilities. Setting up an AvaSocial account is easy and takes only about a couple of minutes. The platform enables traders not only to copy trade, but also question other traders, exchange ideas and knowledge. Find, follow, join or create trading networks specified for trading certain asset classes or strategies. In addition, the platform enables successful traders to sell their expertise to other traders.

Live Trading

As an alternative to prop trading, traders can use retail live trading accounts and invest their own money into the financial markets.

There are various forms of live trading, multiple asset classes are offered to choose from, and traders have more freedom to do whatever they want. Which can be dangerous for many. When trading at prop firms, your every move is monitored and the amount of losses you can take is strictly limited. Prop firms generally have strict daily loss limits, and trailing drawdown limits, as well as profit targets for their traders. The lack of trading control can lead retail traders to opening oversized orders, overtrading, or revenge trading.

It’s difficult to manage human emotions when trading your own funds, and you are your own risk manager. Some of the most dangerous emotions that need to be suppressed are:

  • Greed: greed leads to taking more risks, opening oversized positions, and overtrading. It’s important to note that greedy traders often lose money. Your main goal should not be to make the most money, your main goal should be to trade the right way. And when you are focused on finding the best setups, while avoiding bad ones, the money will follow.
  • Fear: fear of losing money is common after losses in the financial markets, however, it’s important to understand that losing is a part of the trading process. Fear paralyzes traders and makes them miss great trading opportunities.
  • Revenge trading: after losing a trade or after a series of losses, many traders tend to revenge trade and open large positions, or multiple smaller ones to get back what they’ve lost. When traders revenge trade, rules of risk management are ignored. Judgment gets cloudy and traders fail to select the best trading opportunities. Revenge trading often ends in extensive losses. To avoid losing money, many traders set limits to themselves. Similarly to prop firms, professional traders have daily, weekly, and quarterly limits.
  • Hope: When a trader hopes that his/her predictions will come true, it means the trader is unprepared. There’s no place for hope when you have tested, and back tested a trading system, understand that profitable trading is never about a single successful trade, and you spread risks to multiple trading opportunities. Traders who fully trust their systems never hope.

One major benefit that comes with live trading is that it offers enhanced learning opportunities to traders. One can never learn how to manage their emotions well when they are demo trading with fake money. In addition, live trading conditions sometimes differ from demo trading, which is why many brokers offer micro accounts to traders that wish to test their strategies in a live environment with the lowest possible capital at risk.

Another obvious benefit of live trading is profit potential. While prop firms are very restrictive in their risk management policies, retail traders can be more free. And taking higher risks can bring more returns. Furthermore, there are no demo challenges for retail live traders to overcome, they use their own capital and can start trading whenever they want. And there are no time or asset class restrictions for retail traders.

Closing Thoughts

To sum it all up, prop trading is a great way for traders with limited capital and great skills to get funded and manage a company’s money, however, prop firms generally offer strict terms and conditions. In addition, completing account funded challenges is never easy and most traders fail to get funded. Luckily, there are many great alternatives to prop trading:

  • Demo trading: best for beginners, and strategy testers.
  • No Deposit Bonus Trading: best suited for skilled traders with limited capital. No deposit bonuses are often non-withdrawable right away, and traders are expected to meet certain trading requirements to get access to withdrawing the money.
  • Social Trading: social trading enables traders to copy successful traders, share ideas and knowledge, or become signal providers.
  • Live Trading: live trading offers profit potential for traders and provides beginners with extensive learning opportunities.

Whichever trading route you choose, it’s important to note that trading live markets come with inherited risks. Losing is a part of the process, and the key to success is having trades that cover the losses and increase account balance step-by-step.

FAQs on best alternatives to proprietary trading

What is the best alternative to prop trading?

Is prop trading worth it, or should I search for other options?

How do hedge funds differ from proprietary trading firms, and which is a better career path?

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