Proprietary trading, also commonly known as prop trading, is a form of trading where financial firms and banks provide traders with funded accounts. These firms utilize various trading strategies to generate returns through speculative trades using their own funds. To excel in prop trading, it is important to utilize the right trading strategy and adapt it to your working techniques. Prop trading strategies require competence, prompt decision-making, and risk management skills making prop trading an exciting and challenging.
There is a plethora of trading strategies to choose from. In this article, we are going to explore popular trading strategies and approaches that can help traders maximize their profits and manage risks effectively.
Algorithmic trading, also called automated trading or algo trading, is a trading strategy that utilizes computer programming to place trades. The programming follows a predefined set of instructions (algorithms) and executes orders at a speed impossible for humans to achieve. The instructions are usually based on timing, price, trading volume, and other mathematical metrics. Algorithmic trading eliminates human emotions and psychology from trades ensuring more smooth and efficient execution, instantly places multiple orders, and helps to reduce fees.
Algorithmic trading is experiencing a steady rise among prop traders. After the challenge purchase, the predefined algorithms that have gone through rigorous back testing are being implemented, thus helping to maximize prop traders’ profit and helping them to navigate the modern financial markets.
Algorithms in prop trading play a crucial role in executing trades efficiently. Some of key algorithms include:
These algorithms identify market trends and place trades in those directions. They use technical indicators like moving averages and momentum oscillators to make trading decisions.
These algorithms analyze news, social media, and other data to gauge market sentiments. They use natural language processing (NLP) techniques to predict price movements based on public sentiment.
These algorithms train models that can predict future price movements by analyzing historical data.
Algorithmic trading offers speed, efficiency, and objectivity in trading, however, keep in mind that it also carries significant risks. The program can malfunction or be hacked, and generally high-speed trading amplifies systematic risks. It is important to implement good risk management and constantly monitor the trades.
Arbitrage trading is a form of trading strategy where traders profit from tiny price differences while simultaneously purchasing and selling the same asset in different markets. Arbitrage can occur in any type of market, most commonly in liquid markets such as commodity futures, stocks, and major forex pairs.
There are multiple types of arbitrages used for different tactics. The choice is based on the trade type and technics you use. Here are some of the most used arbitrage types:
This is a quick risk-free strategy that includes quick purchase and sale of the assets.
It exploits price differences between convertible securities and the underlying stock. Traders typically go long on the convertible security and short the underlying stock, profiting from the mispricing.
It involves trading stocks of companies involved in mergers or acquisitions. Traders buy the stock of the target company and sell the stock of the acquiring company, betting that the deal will go through, and the target company's stock will rise.
Arbitrage trading, while promisingly consistent and relatively risk-free, still has some challenges. The rewards traders get from arbitrage trading include enhancing market efficiency and providing diversification benefits; however, traders face several risks such as execution delays, liquidity issues, market volatility, counterparty defaults, regulatory changes, and technological failures.
HFT (High-Frequency Trading) is a trading method in which computer programs are used to execute a large number of trades within a second. This type of trading utilizes complex algorithms to analyze market data and execute orders based on conditions.
HFT allows traders to execute millions of orders and analyze data from multiple markets in a matter of seconds, giving firms using HFT an advantage in the open market. In 2016, HFT initiated 10-40% of trading volumes in equities, and 10-15% of volume in forex and commodities markets.
To handle large volumes of trades, HFT uses advanced tools and technologies for ultra-fast execution. Among the tools and technologies used to achieve HFT speed are:
HFT has raised several regulatory concerns due to its impact on market stability and fairness. It is often criticized for allowing big corporates using their advanced technology to gain advantage over their competitors, including retail investors.
Another major concern is market volatility. Rapid and large volumes of trades create conditions in which the price swings are exacerbated, leading to events like “Flash Crash”. As a result, regulators have implemented several measures to address the concerns regarding HFT. Among them, the increase of transparency and reduction of systematic risk, as well as prohibition of certain kinds of HFT that constitute an illegal form of front-running.
Copy trading, also referred to as social trading, is a strategy that allows traders to duplicate the trades of other more experienced traders. Copy trading can be either manual or automated and it is up to the trader to decide how they want to approach copy trading. Additionally, copy traders preserve the ability to disconnect the copied trades and manage them themselves. While the traders whose trades are copied are paid flat fees monthly.
Copy trading enables beginner traders to gain new skills by following more experienced traders and diversifying their portfolios. However, copy trading doesn’t eliminate risk and it doesn’t guarantee that a strategy that worked for one trader will bring success to another trader. Hence it is important to monitor your traders and apply changes where needed.
Before starting copy trading, traders should do their due diligence and conduct their own market research. SIEG Fund Academy offers a variety of resources for traders of different expertise, we also offer in-platform signals and technical charts indicators to help our traders stay informed of their trades and follow how market behaves.
In conclusion, prop trading offers a variety of strategies that cater to different trading styles and objectives. However, all these trading strategies require a deep understanding of the markets, robust risk management, and constant monitoring to ensure success.
Choosing a reliable and reputable prop trading firm is essential to ensure stability and reduce the risks associated with prop trading. SIEG Fund is designed to meet the needs of traders at all levels of expertise by offering various prop trading strategies. We allow you to scalp, copy trade, and use sophisticated algorithms to accommodate your trading preferences, among other strategies. For more information, explore SIEG Fund trading challenges and the advantages we offer.
