Prop Trading vs Live Trading: Advantages and Disadvantages

Comparisons between prop trading and live trading has recently generated some form of debate among various stakeholders in the trading space. Both of them are popular trading strategies, and  investors and traders often grapple when choosing the best approach among them. 

While they both have their unique advantages and disadvantages, it is important to have a good understanding of the distinctions between them.

In this article, we will provide an exclusive overview of both strategies, highlighting their key features, advantages and disadvantages. After engaging this article, you will not only expand your knowledge on this subject, but will also be able to make informed decisions. 

Overview of Prop Trading and Live Trading

Prop Trading:

Proprietary trading (popularly known as prop trading) is a practice where a firm uses its own capital to trade financial instruments. This includes stocks, bonds, currencies, and derivatives. These firms often have access to substantial capital, with which they can take larger positions and potentially reap greater rewards.

Having the primary objective of generating profits from market activities, these firms usually employ professional traders with extensive experience and knowledge. With access to substantial capital, they also employ sophisticated strategies, advanced technology, and quantitative analysis to achieve their objectives.

Features of Prop Trading  

1. Prop trading firms often provide traders with access to cutting-edge trading platforms, analytics and trading capital and other proprietary facilities. 
2. Traders who trade for these firms use the firm’s capital rather than their own, allowing them to leverage larger positions. The traders earn a portion of the profits they generate.
3. Prop firms typically have strict risk management protocols to protect their capital and ensure sustainable trading practices.

Advantages of Prop Trading

1. Access to Capital: Given their large capital base, Prop trading firms can take larger positions and potentially earn higher returns. Prop traders benefit from the firm’s capital, and do not need to risk their personal funds.
2. Lower transaction costs: Prop trading firms may have access to lower transaction costs and may have better access to market information.
3. Risk Mitigation: Trading within a prop firm typically implies access to resources that can help mitigate risks, such as advanced analytical tools and expert advice.
4. Training for Traders: Most prop firms offer training and mentorship programs for their traders. This  helps them to develop their skills and strategies.
5. Reduced Emotional Stress: Since the firm bears most of the financial risk, traders may experience less emotional pressure than individual traders.

Disadvantages of Prop Trading 

1. Trading with prop firms may sometimes expose traders to high pressure as they are usually expected to perform consistently at high levels.
2. Sometimes, sticking to the firm’s rules and strategies may limit traders’ creativity and personal strategies.
3. Traders under prop trading firms can’t retain the full amount of the profits they generate because the profits are shared with the firm.  
4. Prop trading firms may face limitations on the types of securities they can trade and the leverage they can use.

At this point, we can now have a quick rundown of live trading.   

Live Trading 

For live trading, individual investors or traders use their own money to trade in real-time on the market. Live traders can purchase and sell financial products based on their research, plans, and perceptions of the market. Brokerage firms and online trading platforms are two of the popular platforms for live trading.

Unlike prop trading,  traders have complete control of  their trading choices and earnings in live trading. They have greater flexibility and can trade a wide array of securities and adjust their strategies based on personal preferences. On the other hand, they also bear all of the risks involved in their transactions.

Features of Live Trading

1. For live trading, traders use their personal funds to trade, bearing the full risk and reward of their trading decisions individually.
2. Live trading offers traders full control of their strategies and decisions, allowing them to fully express their personal trading strategies.
3. With live trading, traders can have access to a variety of trading instruments and asset classes across different markets.
4. Live traders have greater flexibility, and can choose when and how to trade.

Advantages of Live Trading

1. Complete Control: live trading allows individual traders exercise full control over their trading decisions, strategies, and risk management, allowing for a personalized approach.
2. Flexibility: Traders can adapt their strategies quickly in response to market conditions, without needing to conform to a firm’s policies.
3. Less Pressure: Live trading can be less stressful as traders are not under constant evaluation by a firm or peers.
4. Full Profits Retained:  With live trading, traders keep all the profits generated from their trades, without having to share with a firm.

Disadvantages of Live Trading

1. Capital Constraints: Individuals in live trading use their personal funds to trade. This may limit their ability to take larger positions compared to prop traders. 
2. Resource Constraints: Some live traders may also not have access to the advanced tools, and support systems available at prop trading firms.
3. Time Consuming: Successful live trading  can be time consuming because it often requires extensive research and analysis by individual traders.
4. Higher Emotional Stress: Since individual traders bear all the risks, they may experience heightened emotional stress during volatile market conditions. 

Conclusion 

Both prop trading and live trading offer unique features and  advantages that appeal to different types of traders. From the information presented in this article, you can better identify  which one is more suitable for you.

Frequently Asked Questions

What happens if a trader loses money in prop trading?

• If a trader violates the maximum drawdown rule and loses money in prop trading, he will lose access to the account. In some cases, the trader must pay and will have to pass the account again.

How do prop traders get paid?

• The profits they generate are being split between the trader and the prop firm that provided the capital.

What is the difference between prop trading and live trading?

• Prop trading entails trading with capital provided by a firm and sharing the profits generated with the firm. Whereas, live trading entails trading with individual funds and exclusively retaining the profits and losses also.