“When you’re in the [prop trading] environment, you feed off the competition. It makes a huge difference”
Prop Trading, Managing Volatility, Risk:Reward and more… The big talking points on this podcast:
- What is prop trading and how can retail traders benefit?
- Why you shouldn’t be ‘trading the news’
- Managing volatility: How best to navigate the swings of dynamic markets?
What is prop trading?
Proprietary trading, or prop trading, is traditionally defined as a system whereby a financial institution invests for direct market gain rather than by earning commission on behalf of clients.
This time on Trading Global Markets Decoded, our host Martin Essex is joined by Morad Askar, head trainer of Convergent Trading and advocate for developing prop trading communities.
Morad has always traded in a professional prop trading environment and ran his own business until 2010, when he decided to direct his attention to online traders. On the agenda this time: prop trading and the benefits for retail traders, the perils of ‘trading the news’, and how to find a method in the madness of volatility. You can listen to this podcast with Morad Askar by clicking on the link above or through one of the alternative platforms listed below.
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How does prop trading work?
The prop trading arrangement is such that a trader is often hired on a contract basis with no subscription fee or payment; the risk capital being put up by the company, which then shares the profits. “This was a very popular way of for companies to take advantage of talent from about 2000 to about 2010,” Morad says.
He argues that close proximity to a community of traders that you can feed off is integral to a professional prop trading approach. “People trading online in their condo somewhere in London or Hong Kong or Singapore are generally extremely isolated.”
So how can this ‘community’ feel of prop trading be utilized by online retail traders? Morad says that, in his own company, he tries to encourage a collaborative approach by giving traders access to global communities through chat, webinars and apps. “When you’re in this kind of professional environment the biggest thing you feed off is the competition. It makes a huge difference.”
Trading major news releases: The right approach
Next, Morad discusses the approach to take when major news releases come out. “You don’t trade the news. There are computers that get the line of news, parse it and respond to it in an microseconds.
“However there is a way that news unfolds; a three-wave pattern that traders can take advantage of, but it involves letting the market calm down and focusing on technical patterns.”
It follows that Morad’s overall approach is a ‘statistically minded’ one, with more of a focus on the merits of technical analysis. “I’m always looking for a historical probability that has an edge; to take a historical probability as a gross figure and build a trade around it.
“[I ask], what has the market done so far, what is it trying to do and how effective is it at doing that? And once I establish a bias I look for some probability I can pull from my bank of statistics.”
How do you trade volatile markets?
Talk moves on to market volatility. What’s the best way of trading dynamic assets?
“Volatility is a good thing because volatility creates wider ranges, more price discovery and more opportunities to make money,” Morad says. “But too much of something is never good. Volatility requires us to reassess our risk portrayed in terms of how much quantity we’ve put on.”
He uses the S&P as an example. “The S&P ebbs and flows currently in about a five-point range. Five points in the S&P is about 20 ticks and each tick is worth $12.50.
“If, all of a sudden, the ebb and flow of the S&P is 12 points instead of five, I’d need to trade less than half the size; I’d need to cut my size from 48 lots to 24, 20 or 16 and widen my stop loss orders by twice as much, as well as extend my targets by twice as much to keep my risk per trade the same in relation to my account size.”
If this process isn’t followed, and he continues to use a five-point stop, that stop is going to get triggered a lot. ”That means my percentage loss is going to skyrocket and I don’t have an opportunity to catch any winners because I’m too constrained in that market.”
When there’s more volatility, above all, you have to look at your account size. “If your account’s too small to extend your stops and targets reasonably and stay outside of the market’s noise with those stops and targets, then you shouldn’t be trading at all.
“But if my account’s large enough for me to simply reduce my position size to compensate for it then it’s just another day.”
Follow Morad on Twitter for the latest market insights
Check out Morad’s Twitter account at the handle @FuturesTrader71 and discover the latest on his trading outlook.