Let’s be real, trading is already a wild mind game. There’s a whole rollercoaster of emotions involved – the thrill of a winning streak, the gut-punch of a big loss, and an unhealthy obsession with squiggly lines on a screen and economic news & data.
But if that isn’t enough, traders have another choice that can seriously mess with their heads: prop firm or risking your own precious cash?
Let’s take a quick look a both to see the potential psychological factors you may want to consider.
Trading With the Backing of a Prop Firm
Prop firms: the sugar daddies of the trading world. Pay a fee to tryout and if you pass the challenge, they hand you a big wad of cash (or a big virtual account) and say, “Go forth, young grasshopper, and try not to blow it.” Sounds like a dream, right? Maybe…maybe not. Here’s some of the pros and cons:
Pro #1: Less Risk, Baby! Using someone else’s money is oftentimes a heck of a lot less stressful. Instead of that sinking feeling in your stomach when a trade goes south, it’s their problem… mostly. It’s a good way to ease into bigger trades and test out strategies & your psychology without risking the mortgage payment.
Pro #2: Access to capital. Unless you’ve got $50K – $100K laying around to get started, achieving a long-term consistently profitable outcome without taking huge risk is extremely difficult on small accounts.
Prop firms give you that access to lessen that constraint, all for a profit share that is still likely attractive to most, relative to actual returns on a small self-owned account.
Con #1: Evaluation and Fees: Prop firms charge a fee for an evaluation which can include a one-time fee, reset fees, as well as monthly fees for access to data and platforms. It’s one of the mechanisms to filtering out the random people on the internet who are gamblers vs. those who are serious about trading as a business, as well as generating a nice net income stream for the firm.
These fees are not cheap, so you’d better have a profitable system and some sort of track record before committing relatively large capital to any prop firm.
Con #2: Big Brother is Watching. Prop firms aren’t just a free handout. They have rules, man! And they’re usually super strict.
Expect daily & max loss limits, rolling trailing stops, restrictions on what/when you can trade, and the constant nagging feeling you’re going to get fired if you don’t make their cut.
Con #3: Where’s My Slice of the Pie? If you hit it big, guess what? They get a big chunk of your profits. Sharing is caring…even if it kinda stings.
But consider what’s better: keeping 10% gains on a $1K account or sharing 10% gains on a $500K account? You do the math.
Also consider that props firms are not created equal. As with any industry, there may be some who may not be the most trustworthy or reliable options out there, and then there are some great ones with a long history of doing trustworthy business. Make sure to do your due diligence and start slow with a reputable firm if you feel going with a prop firm is right for you.
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Trading Your Own Hard-Earned Dough
Trading your own money with a broker is the ultimate freedom… and the ultimate terror!
Here are some quick trade-offs you may want to consider before handing over your hard earned capital.
Pro #1: Ain’t Nobody the Boss of You. Want to trade crypto at 3 am in your underwear? Go for it! You call the shots, set your own risk limits and processes, which markets to trade and you keep every penny you make…although, the government might have something to say about that last benefit!
Pro #2: The Sweet Taste of Victory. There’s a different kind of satisfaction when you’re trading with the money you worked hard to earn. Wins feel extra sweet, like you’ve truly conquered the market.
Con #1: Market Risk Stress is REAL. Every bad trade feels like a punch to the wallet (because, well, it IS). This emotional strain can cause some folks to second-guess themselves into paralysis or, even worse, make risky moves out of desperation (i.e., revenge trading).
Con #2: Trading goals may take longer to reach. Unless you have a lot of capital to trade and/or you’re an extremely talented risk manager that can execute consistently, growing a small account in a safe and sustainable way will take time. Like years and no matter your trading situation, a positive outcome is not guaranteed.
Of course, it is possible to grow a small account into a very large one in a small amount of time, but that usually requires a high level of risk. The extreme volatility that comes with that level of risk is an environment that can psychologically crush even the most hardened market veterans, let alone trading newbies like us.
Con #3: Brokerage risks. Remember that once you deposit your money with a broker you give up all control of your capital. This means that if your brokerage goes belly up, commits fraud, refuses a withdrawal, etc., there’s really nothing much you can do to get your capital back.
Just like prop firms, not all brokers are made and do business the same. Do your own due diligence and try to stick to regulated brokers in countries with strong financial systems to reduce the non-market risks discussed above.
So What’s the Verdict?
It’s kinda like choosing between a steady paycheck and a wild entrepreneurial adventure. Prop firms offer access to larger accounts for relatively low capital outlay, but you’re also on a shorter leash. Trading your own money means total control of how you want to trade, but the trade-offs for that control may not be for everyone.
At the end of the day, prop firms and brokers are just tools to express ideas and manage risk, and either can be a good option for any trader if used properly. And in some situations, a trader may want to even use both for different trading styles & strategies.
The “best” solution always comes down to your particular trading situation, available risk capital, risk tolerance, skills and execution abilities.
Just remember, no matter which path you choose, those charts are always going to toy with your emotions. So, take the time to research and choose the route the has you screaming a little less on that wild roller coaster ride to whatever your long-term goals may be!
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