In a world where global financial markets seem to be more volatile each year, prop trading firms make profits that are some of the best within high finance. Often overlooked by many so-called experts, the fact is prop trading firms have been successful for decades by following sets of well-tested strategies, emphasizing risk management, and always using the latest technology. If you’re curious as to how prop trading firms always seem to adapt well to evolving markets, here are some secrets to their success.

Spreading the Wealth

The best and most important way prop trading firms adapt to evolving financial markets and come away with large profits is by spreading the wealth. This means rather than focusing only on one particular financial instrument, such as stocks or commodities, prop trading firms instead trade numerous financial instruments each day so that the risk of large losses is mitigated and almost eliminated.

Tremendous Amounts of Capital

Prop trading firms are also well-known for having tremendous amounts of working capital they can give their traders to make daily money in the market. A major difference between these firms and others that specialize in hedge funds or asset management is that a prop firm can keep all its profits earned from trading instruments in all types of financial markets since they are using their own money rather than money given to them by clients.

Numerous Revenue Streams

Since a typical prop trading firm will have traders making thousands of trades each day, the law of averages says the firm will ultimately make money from these trades. But along with these profits, prop trading firms also have other types of revenue streams. One of these involves commissions the firm will charge on all trades their traders execute.

Though these fees are very small, they add up quickly when applied to thousands of daily trades. Training fees are also part of a firm’s revenue stream. When new traders apply to a firm and are accepted, they pay training fees to learn about the best tools and strategies the firm recommends they use to make maximum profits.

Buy Low and Sell High

As traders do in almost any type of financial market, prop trading firms expect their traders to learn how to buy low and sell high to make large profits. However, since firms realize not all traders will succeed, they put certain safeguards in place to protect the firm’s profits.

First, the activities of all traders are always monitored in real-time, allowing the most experienced traders at the firm to recognize a problem and react to poor trading decisions. Prop firms also set limits on their traders, which may be either daily, weekly, or monthly loss limits. Doing so lets the firm protect itself should you make a series of very bad trades that, if left unchecked, could jeopardize its existence.

Profit Sharing

Prop firms are often able to attract top-notch trading talent due to the profit-sharing agreements they enter into with traders with whom they sign a contract. Even though traders are never officially employees of the trading firm, they act as independent contractors with plenty to gain by making the firm as profitable as possible. In some firms, the profit-sharing agreement is 90-10 in favor of the trader, meaning you could potentially make hundreds of thousands of dollars for yourself over the course of a year or two.

Utilizing Technology

Prop trading firms always invest in the latest computer technology to ensure they have the latest software and other technology needed to stay ahead of their competitors. If you are a trader, you can expect to always have access to state-of-the-art hardware and software that will let you make a high volume of trades in very short order.

Since prop trading firms deal in so many different financial markets each day, knowing how to use technology, strategies, and talented traders to adapt to evolving markets is crucial for long-term success. If you’re competitive, can quickly adapt to changing situations, and handle stress with little difficulty, a position at a prop trading firm may be in your future.