Don’t Trade Prop Firms | Podcast Episode #404

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Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance.

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Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

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You can succeed at the stock market, and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market.

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In today’s episode, I’ve got a e-mail for you guys from an individual who every once in a while he’ll tweet at me on Twitter.

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But he I guess it’s not Twitter anymore. It’s X, formerly known as Twitter, is the how the saying goes.

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I guess I don’t know how much longer we’re going to have to keep referring to XSX, formerly known as Twitter.

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But on X, formerly known as Twitter, this individual will reach out to me with some different trade ideas and thoughts.

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And so I always appreciate that. Plus he sent me an e-mail and he said I listened to your last podcast.

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I’m interested in what you have to say about proprietary firms. Prop firms is what we call them for short.

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So that’s what today’s podcast episode is on prop firms and why I really just hate them. I don’t recommend anybody use a prop firm.

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And for today’s episode, we’re giving this guy a good Florida redneck name of Cousin Judd. We all have a Cousin Judd down here in Florida, I think.

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OK, I don’t want to get into that. Hey Ryan, this is the e-mail by the way.

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Hey Ryan, I feel like they always start their emails to you like that. So I thought I would also continue the trend with Hey Ryan, I have been listening to your podcast

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for at least 4:00-ish years now and I must say I enjoy your podcast the most. I really enjoy the bourbon reviews and when you got a bad one I will laugh out loud with your

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review. I can see the reasons why you quit doing it along with people might thinking that you’re a raging

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alcoholic. Just kidding.

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We have had some interaction on Twitter formerly known as XI, like the content that you post there as well.

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Although I am not a member of your community. I have been trading for about 15 years or or so and I only stick with the rubber band plays and

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panic Buy sells on SPX options. Plus the taxes on SPX options are easy to do.

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I won’t get into any of that, but anyone can give it a Google. Those are the only strategies that I use, and I’ve been successful at it.

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If it’s not broke, don’t fix it. I was lucky enough to have someone in my family teach me how to trade in using these strategies.

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Most people don’t have it like that. I didn’t listen to your podcast the other day and you said that you hated prop firms.

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I do see a lot of people trading with them on the Internet, chat rooms and YouTube and all the other social platforms.

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I feel that when you ask most people how they work you get a lawyer type of answer. Well I have 7 eval accounts and two funded accounts and they are all a copy trader but I blew this

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eval blah blah blah garbage. This makes you think that they are garbage.

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Plus you pay a monthly fee just to have them. In fact, 8 accounts with one prop firm will cost you $860.00 a month just to have it operational.

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I’m not a fan, but would you do an in depth 20 minute podcast on prop firms and explain your lack of love for them?

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Sincerely Cousin Judd. So I have a lot of reasons why I do not like prop firms.

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First off, one of the reasons that I despise prop firms is that it’s really trying to circumvent the learning curve by making it essentially harder on yourself.

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What? Why would you circumvent the learning curve and actually make it harder for yourself in the process?

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Because you’re leveraging your money. You’re making it harder to be successful because you’re trading with money that you shouldn’t be

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trading. I talk about don’t go into margin when it’s like 2 to one.

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With prop firms, you’re getting like 12:50. You know what kind of havoc that can wreck on your emotions?

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Not to mention the fact that you lose your money first, not the prop firm. It’s not in equal proportions.

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They’re not giving you 12:50 margin and then all of a sudden you’re only losing 10% of your money when a stock goes down.

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No, you’re losing it all. So yes, prop firms, they’re dangerous for traders, especially those who are just starting out.

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And even I mean if I was doing and I’ve been doing this for over 30 years, would I ever trade with a prop firm?

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I don’t care how little or how much I have never ever. OK.

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So let me back up a little bit and explain to you guys what prop firms are because some of you guys might be like, ryan, you are jumping into this pretty fast.

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I don’t even know what the heck a prop firm is. This is the first time I’ve ever heard of it.

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First prop firm is short for proprietary firm and these are companies that provide traders with capital to trade in exchange for a profit split.

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The idea is that traders can access a larger amount of capital than they might have on their own, potentially increasing their profits.

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That’s what they are in theory. So yes, they give you a whole bunch of money.

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You’re paying all these subscriptions and fees to be able to trade with their money, plus they’re getting a cut of your money.

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Some of it’s like 20%, some of it’s 50%. So the allure of prop firms, now I understand the allure and let me back up because I’m just

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thinking about this right now. If you’re trading with a prop firm and they’re taking let’s say 50% and they’re giving you 12:50

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leverage, but they’re not taking 50% of the risk, then in a sense, no matter what, you’re never trading better than one reward for every two risk, right?

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A one to two reward risk ratio. Meaning that they’re gonna cut 50% but you’re gonna take 100% of the losses.

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I don’t know if my math’s math and on that, but just off the top of my head, you’re taking all the risk, but they’re getting half the reward and it’s not even their money that’s being lost at 1st.

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And I would probably guess or surmise that let’s say you did lose all their money. Let’s say you bought a stock at $100 and it goes to 0 the next day and so they lost all of their

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margin that they put up for you somehow. I would have to guess that in their terms of service that you owe them for that money.

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Just saying, I mean, I know that with TD Ameritrade, with you know, 2 to one margin, if you lose their money, you still owe them.

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You’re not getting out of that. So any case, the idea though is that traders can access more capital as a result of trading with a

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prop firm and then what they would be able to do on their own, potentially increasing their profits. That’s what I’m saying it’s they’re circumventing the learning process.

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It’s good to start trading with a small amount money that you can afford to lose and to not worry about, OK, if you’re trading like $2000 and you put $200.00 on a trade, that’s a stock that’s worth,

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you know, 50 bucks a share and you make 10%. Yeah, you only made 20 bucks off of it, but who cares?

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The process of learning is far more important than the amount of profit that you’re making in the early stages of trading.

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Yes, you don’t want to blow up your account, but it’s about learning the systematic approach to trading as it pertains to managing the risk, managing the profits, getting in a trade, getting out

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of a trade, managing the motions. And so the allure of prop firms are huge.

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For new traders, it’s the promise of a ton of capital and the potential for huge returns. We’re using that capital.

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That makes it very tempting, but they’re not in your best interests and using them. And the first reason why is it creates a very high pressure environment and it’ll lead to just

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horrible decision making. I talk about how I don’t even go into margin when I’m trading my own accounts.

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The most I will get is 100% long. I’m not going 110 or 120 or much less, 200% long.

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Even though your traditional brokerages will allow you to do that, I don’t do it. One, you’re paying interest on it too.

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But I also know that if I do that, it’s going to increase the emotions because again, keeping the math simple, if you have $100 account and you have an account with Schwab and they give you, you

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know, 100% of additional trading capital, OK, so now you have $200 to trade, but here’s the thing, you only want to put 10% of your money on a single trade.

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That’s what you’re comfortable with. But now that you have $200 in your account, because of the margin, you’re saying to yourself, OK,

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I’m gonna put 20%. But in reality, what you’re really doing is, is that you’re increasing your position size to 20%.

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And you may not be ready for that. That may not be something that even fits your risk profile.

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So yes, the lure of bigger profits are huge, but this leads to impulsive trading and to some big losses.

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And when you trade with a prop firm, you give up a degree of control over your trading. The proper may have certain rules and restrictions on what you can trade, how you can trade, how

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long you can trade a certain kind of a stock, limiting your ability to follow your own strategy or even be able to respect your own risk profile.

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And then the profit split is a huge issue. Like why in the heck are you going to let them take a cut of your money on top of all the

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subscription fees and usage of software and all this other crap? Come on.

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Well, it may seem like it’s a good idea to keep a percentage of your profits. Remember that the prop firm is also taking on the risk so that if you have a losing, not really

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taking on the risk. But they kind of like allude to the idea that they’re taking on the risk.

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But if you have a losing month, you’re gonna end up owing them money. Yeah, they’re gonna want it back.

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It’s so scandalous and ridiculous, in my opinion, how stupid prop firms are. I don’t even know how they sell this to the public, but yet people sign up for it.

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And probably a number of people that are listening to this are using prop firms too, and they’re probably, like getting a little squeamish in their seats.

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Hopefully I get some emails from you guys. I would love to hear from you guys.

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I’ll make an episode out of why you think I should be a proponent of prop firms, which I don’t know what you would have to say to be able to convince me of that it’s not gonna work but still do it.

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I mean, I would love to hear from you guys. Also, something that’s not gonna take a cut of your profits is swingtradingthestockmarket.com.

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Yes, it’s a great way to support the podcast, but what I’m interested in doing here is teaching and helping people to understand the market, to better trade the market.

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So that’s what you’re getting with swingtradingthe-stockmarket.com. That’s going to include daily watch lists of stocks that I’m following, watch lists, reviews each and every day.

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You’re getting updates on the big tech stocks, you’re getting updates on the stock market as a whole, and you are going to get my weekly bullish and bearish master lists of stocks that I’m following for the week ahead.

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So here’s another reason for you guys. Scandals and simulators.

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Holy cow. What do these two words have in common?

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Let me tell you, there’s so many scandals with prop firms. I mean tons of them.

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I remember back years ago, and I haven’t been approached by one in a long time, but I remember a long time ago, a prop firm approached me and they were saying by approaching that like on the

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streets or something down a dark alley, they emailed me. I don’t even think that they’re around anymore.

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I’m pretty sure they’re not, But they wanted me to start pushing the prop firm on to everybody that comes onto the website and they’re like, oh, put trades out there.

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And for every person that you get to sign up to our prop firm, we’re going to give you like $2.00 for every one of their trades.

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So you got to really get a lot of trades going so that you’re racking up commissions and then we’ll give you $2 for every trade, both on the closing side and on the opening side.

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I’m like, no, heck no, I ain’t doing that. First of all, I want to be able to sleep at night, and that is a surefire way not to be able to

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sleep at night. And it just goes against my convictions and my morals.

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I’m not going to do that. But there’s a lot of services out there that will have you or encourage you to sign up to a prop

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firm. And the reason why they’re doing that is because they will make money off of every single trade that

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you make. Even if they’re not even recommending trades or you know, telling you what trades to get into or get

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out of, they will make money off of every one of your trades. That’s typically how these people work, and I’m not doing that, absolutely not especially knowing

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how scandalous that they have been over the years. Let me tell you about their simulators.

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They assume that you’re not going to make it. So what do they do?

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They put you on a simulator, they make you think that you’re trading, and then they let you take on all the losses, but you’re not actually taking the losses.

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But they’ll tell you that you took the losses and they’ll keep the money for themselves. So let’s say that you don’t have any money in your name and you really want to get into trading.

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So you get a credit card, you do a cash out thing, cash back, whatever they call that stuff. I’ve never done it before, but you get cashed off of your credit card, you get $2500, you give it to

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the prop firm, they say, OK, we’re gonna spot you 12:50. Now all of a sudden, you don’t have the pattern Day trader rule assigned to you.

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Guess what they’re hoping that you’re gonna do? That you’re gonna blow up your account, ’cause they’re not gonna actually let you trade.

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They’re going to act like that. They’re routing your orders and that it’s getting filled.

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And they have a fancy simulator that’ll make it look like that, but they’re cheering against you because they’re just gonna say, OK, now let’s watch him, like, blow up his account on the simulator.

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You think you’re trading with real money, but you’re not and you still blow up your account. You know, you take, let’s say you get into a a stock trade and it goes down 50%.

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Well, guess what? You just wiped out your account and it’s considering that you put all $25,000 on this trade, you’re

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down $12,500 and what you think is real money. And then all of a sudden they’re saying, oh, hey, guess what, You owe us like $10,000 too, even

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though they didn’t actually lose anything. You lost money on their simulators.

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But you think that you’re trading real, so you pay them the $10,000 because you think that’s what you owe them.

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And guess what? You never actually owe them anything ’cause they didn’t actually lose any money.

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So that’s how bad prop firms are. And guess what?

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Most of them are offshore. Most of them are offshore.

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So what’s your recourse gonna be? Nothing.

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What, are you gonna get them extradited to the United States? Good luck with that when you try to explain that to somebody.

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So what’s the alternative? It’s trading your own capital.

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In my view, this is the best approach to trading. Trade your own capital.

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Don’t use margin, don’t use prop firms. Yes, you may not like having to start small, but you’ll at least have complete control over your

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trading decisions. And in an environment where you’re not paying $20 anymore to get in or get out of a trade, yes,

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you’re not going to make a ton of money on your winning trades. But as you’re learning the ropes, you’re not going to be losing a ton on your losing trades either

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if you manage the risk. So you can develop your own strategy at your own pace without the pressure of meeting someone else’s

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targets or expectations or or worried about the interest. You’re being charged on your accounts and you’ll be trading in a real market and not in a simulator.

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So while these platforms seem like an attractive option, especially for new traders, I believe they come with huge amounts of risk and really detrimental risks and incredible amounts of scams in this

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area of the financial sector. The high pressure environment, lack of control, the crazy profit splits, the potential for scandals,

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the use of simulators can all work against your success as a trader. So my advice is to take the slower but steadier path of trading your own capital and the real

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market. Yes, the real market with your own money and develop your skills over time.

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Don’t try to force the development. If you enjoyed this podcast episode, I would encourage you to leave me a five star review if you

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can, on whatever platform you’re listening to it on. Plus, check out swingtradingthestockmarket.com.

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And yes, I still want to hear from you guys. I want to hear your stories.

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What is driving you crazy? What are your problems?

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What is your story? Tell this stuff to me ryan@shareplanner.com and more than likely you’ll get a podcast episode out of

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it. Thank you guys and God bless.

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Thanks for listening to my podcast Swing Trading the Stock Market. I’d like to encourage you to join me in the SharePlanner or trading block where I navigate the stock

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If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.