Prop Trading vs Other Trading Models: Which Path Should Traders Choose?

Key Highlights

Investors and traders compare prop trading with its alternatives, like hedge funds, copy trading, and retail trading, to help them determine which models best fit their trading career paths. 

Some of the most popular alternatives to prop trading firms are:

• Retail Trading: Use own funds to trade assets and financial instruments, with trading taking place via regulated brokers or reputable CFD brokers. 
• Hedge Funds: They use long-term strategies to manage external capital from wealthy individuals and pension funds.
• Copy Trading: These are trading platforms that enable traders to replicate expert trading strategies without having to pass an evaluation challenge. 
• Signal Trading: Signal trading companies allow traders to directly mirror the trades being placed by seasoned traders without taking on the challenge.
• Managed Accounts: It’s where a skilled trader or professional manager is allowed to simultaneously manage multiple client accounts through the MT4 and MT5 platforms.
• Institutional Desks: Examples of these include asset management firms and investment banks that use quant teams for long-term portfolio management and factor-based investing. 

Comparing Prop Trading Firms

Proprietary/Prop trading occurs when a trader uses the capital offered by a company to open trade positions instead of risking their own personal funds. Prop companies provide trading opportunities or enable skilled traders to trade in a simulated environment, providing them access to advanced trading tools and significant capital allocations in the form of funded trading accounts. 

In return, these traders are expected to share a small percentage of the profits made from their trading endeavors with the prop trading company. We can, therefore, say that prop trading makes it possible for skilled individuals to participate in high-volume trading that would ordinarily have been impossible without using their own funds.

Investors and traders compare prop trading with its alternatives, like hedge funds, copy trading, and retail trading, to help them determine which models best fit their trading career paths. They may also do it to establish which path offers the best use of their available capital. In this guide, we will look at how each of these alternatives measures up to prop trading in all areas, including risk tolerance. 

Why Traders Look for Alternatives to Prop Trading

While prop firms provide a much-needed access to large capital to traders looking for ways to trade without their own capital, it’s not uncommon to find some looking for alternatives to prop trading. 

Often, this happens for several reasons. Top among these is that such traders want full autonomy, and thus find prop firms to be too restrictive.

Other reasons why this may happen include:

1. Capital Constraints: Prop firms require that all traders who wish to take their evaluation challenges pay an upfront, usually non-refundable fee. Those who fail will need to make another payment, thus transforming an otherwise good idea into a money-drainer. Such capital constraints may put off some traders. 
2. Risk Tolerance: Another thing to note is that these companies have very low total drawdowns (maximum loss limits). Some traders, especially those who like to hold positions overnight or over the weekend to try to ride out market volatility, may find such rules to be too restrictive. 
3. Career Goals: Considering that we are talking about prop trading vs alternatives, that means the issue of career goals had to come up at some point. In the world of trading, not everyone you encounter will want autonomy. Some traders want long-term careers, and will thus look for roles that have job security, benefits, e.g., health insurance, and base salaries.
4. Time Commitment: It’s not unheard of for prop firms to have strict time-based rules that lead to the creation of a high-pressure environment, which may be bad for long-term trading. Apart from the high-pressure deadlines, the other reason a trader may want to look for an alternative to a prop firm has to do with forced trading, as traders try to beat the ticking clock. 
5. Regulatory Access: Lastly, the other reason that traders are on the lookout for alternatives is because of the unregulated/opaque environment that prop traders operate in. The fact is that many retail prop firms in operation don’t hold licenses as they aren’t required to. As such, this means that they operate without any kind of supervision from the FCA, SEC, and other financial authorities. 

What Is Prop Trading? (Quick Recap)

Proprietary trading is a business model where a company provides skilled and carefully vetted traders with access to its capital to use in trading financial instruments, instead of using their own capital. These traders are required to adhere to strict risk management rules in exchange for a share of the profits. This, thus, translates to no risk to own capital and profit sharing with the firm. 

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Overview of Prop Trading Alternatives

The alternatives to prop trading will require you to look into funded trading vs self-funded trading options. And in this space, you’ll note that the available choices include joining market-making firms and using copy trading firms to manage other investors’ capital. Such options will traditionally provide direct ownership of profits, freedom from strict drawdown rules, and, in some cases, a steady salary. 

Popular alternatives include:

• Retail Trading: Use own funds to trade assets and financial instruments, with trading taking place via regulated brokers or reputable CFD brokers. 
• Hedge Funds: They use long-term strategies to manage external capital from wealthy individuals and pension funds.
• Copy Trading: These are trading platforms that enable traders to replicate expert trading strategies without having to pass an evaluation challenge. 
• Signal Trading: Signal trading companies allow traders to directly mirror the trades being placed by seasoned traders without taking on an evaluation challenge.
• Managed Accounts: It’s where a skilled trader or professional manager is allowed to simultaneously manage multiple client accounts through the MT4 and MT5 platforms.
• Institutional Desks: Examples of these include asset management firms and investment banks that use quant teams for long-term portfolio management and factor-based investing. 

Prop Trading vs Core Alternatives

Prop trading involves traders using a firm's capital to trade while adhering to strict risk management in return for profit sharing. The core alternatives to prop trading are as follows:

Prop Trading vs Retail Trading

Prop trading provides high leverage and zero personal capital injection, beyond the upfront evaluation fees. Retail trading, on the other hand, requires you to use your own funds with the promise of 100% profit retention as well as full loss exposure. 

Key Differences:

• Capital Source:  Prop traders use firm-allocated capital, often from $40,000, while retail traders use their own funds (usually in the form of small deposits) to trade. 
• Risk Ownership: Profits and losses are shared with the prop firm in prop trading. A retail trader gets to keep 100% of the profits made and carries the burden of their losses. 
• Skill Requirement: Prop firms evaluate their traders based on their ability to maintain a consistent, low drawdown performance. For retail traders, what’s needed is self-discipline and an entrepreneurial spirit.
• Scalability: The scaling mechanism in prop trading is performance-based. In retail trading, your scalability will depend on your depositing/compounding.
• Who It’s Best For: Prop trading is best for experienced traders who need capital to scale. Conversely, retail trading is recommended for traders who want freedom or full control over their accounts. 

Click here to learn more about Prop Trading Firms vs Retail Trading

Prop Trading vs Hedge Funds

Prop trading is fast-paced and comes with a higher risk. Hedge funds are more focused on long-term diversified investments and the use of regulated strategies. 

Here’s a look at their key differences:

• Capital Source: Prop traders use company-provided capital, with the amounts differing depending on the type of account and skill level. Hedge funds use external capital from wealthy individuals.
• Risk Ownership: The risk-reward ratio in prop trading is higher as traders get to keep 80% to 90% of the profits made. Hedge funds provide a base salary coupled with performance bonuses. 
• Skill Requirement: Prop trading has a low barrier requirement and only requires technical skills and quick decision-making. You need a prestigious educational background and a deep understanding of financial modeling and quantitative research to work for a hedge fund. 
• Scalability: It’s directly tied to performance milestones in prop trading. The scaling mechanism is slow in hedge funds as it’s based on fundraising abilities. 
• Who It’s Best For: Prop trading is recommended for independent traders looking for high, immediate payouts. Hedge funds are ideal for professionals who want to earn steady, long-term returns. 

Click here to read our detailed comparison guide on Prop Trading Firms vs Hedge Funds

Prop Trading vs Trading Your Own Capital

Prop trading allows you access to large, funded accounts with enforced rules and limited financial risk to you. Trading with your own capital provides full autonomy and requires you to carry all the risks.

The key differences between these two include:

• Capital Source: The prop trading company will provide the capital to use in trading financial instruments. When trading your own capital, you’ll have to use your own funds. 
• Risk Ownership: Prop trading comes with low personal risk, as the prop firm will absorb some of the losses made. Trading one's own funds means increased risk that may lead to a loss of all money. 
•  Skill Requirement: You must prove that you’re a consistent and disciplined trader by passing an evaluation. Trading your own money won’t require any evaluation. 
• Scalability: Prop firms use a performance-based scaling model that rewards consistency and profitability with a higher allocation. Your savings rate will determine your scalability when trading with your own money. 
• Who It’s Best For: Disciplined traders with access to limited capital can excel in prop trading. Personal trading is recommended for those with enough capital and who wish to retain all profits made. 

Click here to read our detailed comparison guide on Prop Trading vs Trading Your Own Capital

Prop Trading vs Social & Delegated Models

Prop trading and social and delegated models primarily differ in the role played by the trader, capital ownership, and risk responsibility. For instance, prop traders get to trade with the firm’s capital. In social and delegated models, traders get to mimic the moves made by a “master” or “lead trader.”

Here’s a look at how these trading models compare:

Prop Trading vs Copy Trading

Prop traders must pass a skill-based evaluation to become funded. Copy traders get to replicate the positions of successful traders. 

Click here to read our detailed Prop Trading vs Copy Trading guide.

Prop Trading vs Signal Trading

Prop trading eliminates the need to risk one's own funds for trading, but comes with strict rules. Signal trading requires the trader to follow the buy/sell recommendations provided by a third party. 

Key differences between the two:

Click here to see our detailed guide on Prop Trading vs Signal Trading

Prop Trading vs Signal Selling

Prop trading requires you to pass an evaluation challenge to access the firm’s capital. In signal selling, traders can generate income regardless of market performance by selling signal recommendations. 

Below is a table showing their key differences:

Click here to check out our Prop Trading vs Signal Selling comparison guide. 

Prop Trading vs Managed Accounts (PAMM/MAM)

Prop trading is for seasoned traders who need access to a firm’s capital to enable them to trade larger financial instruments. Managed accounts, on the other hand, allow wealthy individuals to entrust their money to professional account managers. 

Check out the comparison table below:

Click here for a detailed comparison of Prop Trading vs Managed Accounts (PAMM/MAM).

Prop Trading vs Institutional & Advanced Models

Prop trading and institutional models share one similarity: traders get to use firm capital. However, their differences are many and touch on the technology used, risk management strategies, and scaling mechanisms at play. 

Let’s take a closer look at their differences:

Prop Trading vs Institutional Trading

Prop traders rely on the prop trading company’s capital allocation, while institutional traders use client money to trade. Click here to learn more about Prop Trading vs Institutional Trading. 

Prop Trading vs Investment Bank Trading Desks

In prop trading, the traders are compensated in terms of a profit or loss percentage agreed upon with the prop firm. Investment Bank Traders, on the other hand, have a base salary that’s linked to their performance and client revenue. Click here to learn more about Prop Trading vs Investment Bank Trading Desks.

Prop Trading vs Quant / Flow Trading

High-risk traders use prop firm capital to take on market risk, with their focus being on speed, technology, and quick decision-making. In flow trading, the risk is lower, and the goal is to provide liquidity to the client. Click here to read more on Prop Trading vs Quant / Flow Trading.

Comparison Table

In the table below, we are going to look at how prop trading compares against its core alternatives. 

Which Trading Path Is Right for You?

If you’re unsure of which career path to follow you, consider the following decision framework:

• If you have skill but no capital → prop trading 
• If you want full freedom → retail trading
• If you want passive exposure → copy trading
• If you want an institutional career → hedge funds

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Common Myths About Prop Trading vs Alternatives

I'm sure you have come across various myths online and in real life related to prop trading and its known alternatives. But how true are these myths? Let’s demystify some of them:

Myth: The prop firm will only make money when I fail the evaluation

Reality: Some firms may profit from failed evaluations, but reputable firms often make money through profit splits.

Myth: When trading, I’ll be trading live capital

Reality: Most funded accounts use simulated environments. 

Conclusion

Prop trading requires you to pass an evaluation challenge to access the prop firm’s capital. It’s a trading model that’s highly favored by traders who need access to a large capital allocation, high leverage, and who don’t wish to trade with their own capital. The prop trading core alternatives, which include retail and institutional trading, provide full autonomy and 100% profit retention, but require you to use your own funds. At Audacity Capital, you’ll get access to a Funded Trader Program that will enable you to showcase your trading skills in exchange for profit splits and a scaling opportunity. 

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