Prop Funding

This post will discuss how the small undercapitalized trader may seek funding. The traditional prop firm model seems to no longer be an option for most futures traders (I wonder if it was it ever an option?) Instead, the most realistic option for funding today is the Topsteptrader model, though not necessarily TST--as the new kid on the block OneUp Trader seems to be the better, if unproven, bet. The model is partially opportunistic towards the trader but also potentially disruptive for the whole industry. The model is based on paying a set fee per month to hit specific and somewhat difficult goals on a monitored trading simulator. Once the goals are hit, the firm will "fund" the trader with a small amount of capital from appx 2k to 5k.

In the past, I was somewhat negative on this model because there were several antagonistic rules. TST in the past came to me for an affiliate opportunity but I declined as I couldn't verify the model. Today however, Topsteptrader has removed most of those antagonistic rules and the time limit making it a more balanced approach. And to their credit TST has payed out at traders.

The other upstart is a firm known as OneUp Trader. While TST has been around for several years, OneUpTrader is the new kid on the block offering the better, if unproven deal. The question is which of these or are either of these good options for the futures trader? One risk is getting stuck on a Combine or OneUp Tradertreadmill where an otherwise profitable trader continually tries and falls short of meeting the stringent funding requirements when they could just be saving and trading their own account within their abilities. And, that's one reason I was negative on these operations in the past. However, the reality is that if a trader is starting with a tiny futures account then there is a high risk of total account loss.

As to whether or not it is possible to do well on a small account, let's imagine a day trader who has a 100k account, keeps risk to 3% or less per day, and manages a 100% return. This level of return seems entirely plausible in the futures markets (not representative or typical but possible). If the trader trading the large account (1) is very consistent/wins most days, (2) does not hold losing positions over the close (most will), and (3) doesn't use advanced techniques that require more capital (most will) then it is, at least, possible to see how it might be possible. A true day trader only needs enough in their account to (1) meet some minimum multiple of the daily loss limit, and (2) have enough to meet margin requirements. Many futures brokers will offer reduced day trading margins. From this, we can see that if a trader has some minimum multiple of the daily loss limit, say 4x the daily loss limit, or 12k plus possibly cushion for margin that the small trader could make a sizable amount on a small account. However, it is important to realize that most large traders violate all the requirements for these assumptions to work. They may day trade but they might hold positions over the close to recover or hit a target or they may have an acceptable loss limit per day but their winning percentage of days might be too low. If the winning percentage is too low then a normal drawdown could still wipeout the small trader.

Really, I see it as a form of shot taking. The professional or serious trader looks at the maximum drawdown of a system or trading method and wants to have a buffer above and beyond that maximum drawdown. The shot taker instead seeks to hit a "good run" before the inevitable drawdown. Given that the reality of small futures traders are essentially going to be "shot taking", it starts to make OneUp Traderand Topsteptrader look like better options  because for a fixed monthly fee: a trader can work on their trading in a serious fashion and can then go on to get the 2k to 5k in funding without having to worry about risking their own money.

In summary, there are options for the small trader today that seeks funding. However, it is advisable for prospective traders to understand that they may, also, be the "customer" in this relationship. Some may be better off trading their own accounts or simply trading in the simulator for free. Two more notes that may be worth knowing: (1) data is included in the trial cost -- a bonus, and (2) you will have to pay professional data fees if you pass and go live. These fees were probably designed or intended for much larger traders: not the tiny stakes that these firms give you and trading too many products could make it very difficult to make money in the live account just due to the data fees alone-- but provided a trader only trades on one or a couple of exchanges then those costs should be fully surmountable (example NYMEX and CME would cost $170 per month).

Notes: No affiliation with either firm. I am currently taking the TST combine and planning to take the OneUp Trader try out. Results discussed are hypothetical/conjecture only and not typical. Read full disclaimer at bottom to learn more about the real risks of futures trading.

Wednesday, June 14, 2017 4:35:00 PM


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Risk Disclosure:

Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure:

Hypothetical performance results have many inherent limitations, some of which are described below. no representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.