A Prop Education

[trader_dante]

Hi Folks,

I just wanted to re-post a thread I originally published in my private forum in July 2009.

I was partly inspired to post this by Dash RipRock and his new thread and also partly by the fact that the content below was loosely lifted without my permission and posted a while back (albeit with credit to me) on www.proptraders.net.

Since that site is making money from the adverts they carry and yet the majority of the content is taken from my posts on T2W which have always been for free, I consider this somewhat unethical.

But at least you can now get to the source.

Although the proptrader site took the whole "we're giving away a programme for free that some firms charge thousands of dollars for" stance, that was never my intention in writing the thread.

While it may be true that some firms do charge for this information, I certainly never paid for a course or for any of the information I am imparting below so I am not "ripping anyone off".

The reason I wrote the thread was because I am sure there are plenty of people that wonder what you would be taught if you are lucky enough to pass the assessments and make the grade to gain entrance into a prop firm.

This is not an education as such: it is a structure or a routine that will allow you to get a very similar experience in terms of "education" to that you would receive at some prop firms.

As you will see, no proprietary knowledge is being imparted, just a framework for your own learning.

I should make it clear that this routine is not meant to replace going to a prop firm. There are advantages to being in prop; not the least of which are excellent commissions, lightning speed execution, rigid risk management (your risk is overseen which is extremely important) and a community of other professionals who you can no doubt learn much off (I certainly did).

It is very hard to get any of these from home.

So, this is merely an outline of the learning routine and how you can follow that same routine from the comfort of your own home.

A final word before I begin:

If you do get into a prop firm, some will charge others won't. Even if you do not have to pay, you will usually be expected to survive on little or no salary. As a result, your "education" may still cost you even if you are not outwardly paying anything.

I have assumed that to complete this "course", a trader will have at least £5,000 at their disposal. This money will be "spent" throughout the course on your education.

Also please note that although the routine described here will help you in all aspects of your trading, it is perhaps intended to hone your skills as a very short term trader.

 

[trader_dante]

Introduction

First off, decide when you are going to start your course. This is a three month course. This is how long it should take you at an absolute minimum to get proficient in this market.

Pick a date. Make sure you have a place at home free of all distraction. You can't have a wife or children (or anyone for that matter) disturbing you. This is an important advantage to prop trading. It gets you out of the house which helps with discipline.

Now you are almost certainly going to be trading futures. So you need to buy and read "How the Futures Markets Work" by J Bernstein which is £4.90 from Amazon used & new. (prices may be outdated and do not include P&P)

If you have a mathematical brain and enjoy a challenge buy and read "The Futures Game: Who Wins, Who Loses, & Why" by Teweles and Jones which is £23.98 on Amazon used & new.

Start these in the two week period before your course begins. Try and read for two or three hours per day. Ideally before bed. You absorb information better.

A few days before your course starts there are some final things you need to do:

Buy "Economics Explained" £0.53 Amazon used & new
Buy "How to Read the Financial Pages" £4.58 on Amazon used & new

In addition to buying the books above, you need to sort out a study. You ideally need a large desk. This will hold your PC, have good natural lighting (and a desk lamp), a telephone (a mobile will do) and some stationery.

Buy a good computer with 3 screens. (get graphics capability for more if you can - upto 6 would be ideal as you may want to expand at a later stage). No, a 15" laptop is not sufficient.

This is going to be the expensive part for you but don't worry as you will have this setup for life. Its cheaper to build it yourself or get a friend too but if you have to shell out it should cost you around £1,000.

Week 1: Foundation: Learn key financial and economic concepts

Now on the day your course starts, here is the important part: Wake up at 5am (you need discipline), get dressed smart and leave your house to go and buy the Financial Times. Come back to your house and read it with a good light, healthy breakfast. At around 6.30am you can now go up to your study. You are now arriving at work. DO NOT TURN ON YOUR COMPUTERS.

You have one chore in your first week. That is to finish the above two books making extensive notes and preserving them. Start at 6.30am and work through to 4pm. Work hard without distraction. Take 30 minutes for lunch. When you are done at 4pm, turn off, shut your study door and do something else. Play with your X-Box, make a great meal, go to the gym, watch TV etc.

Each day you will read the mornings FT in light of the books you are reading.

Week 2: Understanding the concept of cross market analysis, successfully interpreting charts

Buy "If its Raining in Brazil, Buy Starbucks" £4.77 Amazon used & new

Your next step is to read this book, structuring your day the same as before. This should take you 2 days to read as its a short book. By this time you are half way through the second week of your course.

Once you have finished this, return to Amazon.

Buy Getting Started in Technical Analysis" by Jack Schwager which is £2.99 on Amazon used & new.

Complement that with "Technical Trading Online" which is £4.91 on Amazon used & new.

Both those will give you a solid grounding in Technical Analysis.

Now for the rest of the week, when you get to your office in the morning you are going to turn on ONE SCREEN of your 3 screen setup. Only ONE.

You have two options here. You can either subscribe to CQG which is pro charting that prop houses use but this is around £300 per month and will eat into your budget. However, there is another option: download FXPRO's charting package for free. You can do so if you register for a demo account. Google it. The reason why you're going to do this is you want to cross reference your reading with real time charting. Most prop houses trade equities and bonds. They won't let you loose on currencies so forget about them for a start. You will be offered the FTSE or the Bund. Maybe the SMI. You can get equity futures charting for FTSE and the SMI for FREE with FXPRO. You can get the Bund from Broco (Google it- again it is an MT4 download). Play around with the charting software and learn it. Watch ONE market for the rest of the first week such as the FTSE on a few different timeframes. Try 1m, 5m, 15m, 30m, 1hr and Daily charts, side by side. How similar do they look? How do the trends change across each one? e.g. hourly down, 5m up...

And if you've pulled up a chart of the EUR/USD, close it. I said forget the currencies.

Now you're structuring your days as follows. You're reading the above books and following the patterns you read about through with historical data and real time data and seeing how they played out. You're getting a feel for things here. Schwager talks about popular patterns. How many can you spot? Do you see a Head and shoulders forming? How does it play out when it breaks the neckline? If there is a support level, how does the market react to it? Is it more likely to break or hold if price accelerates rather than drifts into it? The thing that seperates those that make it from those that don't is WHAT THEY LOOK FOR. You will never be taught this. Don't just stare at the screen all day, try to rationalise everything you are seeing. Observe. Analyse. Quanitify.

Week 3: Observing the impact of news

You need to do something else each day now. You need to subscribe to RANsquawk - Real-time Analysis & News Limited for a free live 2 week trial of news. (after this it becomes 2 minute delayed. Again its about £300 per month. You've got the money which you wouldn't have if you paid for the course so you might as well use it...) You can also get CNBC Plus (this is about £5 per month and a great value). News wise, prop firms will give you Bloomberg and Reuters. These are both pretty expensive but Ransquawk reads out the news from both and its a fraction of a second delayed so you don't need them - just him! Trust me.

TURN ON YOUR SECOND SCREEN. Each day you will now have 2 screens on and 1 screen off. Now use Ran's calendar to make note of the important news (the ForexFactory calendar will highlight this in red and orange if you struggle). One hour before each piece of news comes out, take notes on what the news is, how it is compiled, why it affects the markets, what the previous number was and what is expected. Then 10 minutes before the news comes out, watch the chart and see what happens. Make notes. Use your brain to make useful notes. Was the news better or worse than expected? How did the market react? Watch your related market for up to 30 minutes after. You are building good knowledge here.

The times you are not preparing for and watching the impact of news you are continuing to read the books on TA that are mentioned above and cross referencing with charts and making extensive notes. Do this everyday for the rest of the week.

You've now had a week of economic and basic market education and a week of screen time with reference to conventionally popular technical analysis and finally a week of studying how the market reacts to news. You have the start of a good grounding here.

Week 4: Learn how to use the tools of the trader, Order entry systems and other software. Learn to understand the principles behind order flow and market pscychology.

Right this is week four. Time to download the pro software - TT! You can get a free trial account with live market data for 2 weeks at a time. Search for brokers that use it. Try with the first broker, when it runs out, repeat with others. It takes a few minutes to install and hey presto you got the same platform in terms of execution as a prop house (and some banks too). Try Velocity Futures first for a free trial. This will be displayed in your third and final screen. TURN IT ON. Play with it for the first week. Pick a market that you've been looking at. If they don't have it, try requesting it. You can use any market but it would be best if it was one you have looked at already. If you can't get one you have already been watching, then make sure you get an appropriate chart to follow whatever is being watched on the ladder. Practice putting in limit orders, stop orders, hitting market etc. Stare at that ladder all day with reference to the charts! What is happening to the order flow at big support or resistance levels? What is happening to the actual orders? Are they being filled or are they just being pulled? What happens at different times? Is the order flow thicker or thinner in the morning?

The final step in the fourth week is to help you create the correct mindset and behavior in preparation for the journey.

You want to buy a copy of "Trading in the Zone" by Mark Douglas which is £12.95 from Amazon used & new. Read just one chapter per day. Read it slowly and read it before bed.

Month 2: Apply the skills learnt so far and practice under different market conditions.

Here comes a solid month of intensive ladder practice. Make sure you are still reading the paper each morning and having a healthy breakfast before you start. You should have 30m - 1hr max for a power lunch and a good evening meal. Get to bed early as you have to be up at 5am (you should have at least 8 hours sleep). Treat your mind and body like an athlete.

When you are in the office, alternate your products by what is available. First week try the FTSE. Second week you could try the SMI. Third week try the Bund (for Bund charting you need a free subscription to prorealtime.com for extensive historical end of day data and can get real time data from Broco - see above) And so on...

So each week will have you staring at one product only. This is to give you a feel for what markets you are good at trading. At the begining of each week, make some notes on your market incuding, what news is likely to move it. If it's an equity index, what can you find out about it? What are the 5 biggest companies are in it? Are any of them reporting earnings in the week you are watching? Do diligent research on as many aspects as you can.

Try a few of these exercises each day, alternating them:

- Try scalping off of the order flow without watching the charts. Turn your charts off and look for support and resistance on the ladder.

- Try just scalping the bigger levels of the day (1hr and higher).

- Try getting a 10 lot on using 2's at a time without going offside 1 tick on your average position. Very hard.

Buy and read:

"Reminiscences of a Stock Operator" £14.97 on Amazon used and new. Get the annotated version by Paul Tudor Jones. It's worth the extra money.

Read it outside of market hours for say two hours each evening before bed.

You don't have the supervision of bigger traders but ask questions on Trade2Win. There will be other traders that trade similar. I can answer many questions on trading even if I don't trade that way and can give many ideas. There are many others that can do so too. Experiment with all answers rather than taking them as gospel. Do not read about strategies whatsoever. And limit your questions to posting and reading outside of working hours (e.g. post in a period of between 4pm - 5pm as last thing you want is distraction throughout the day)

Final month - Live Trading

You've got some more books to buy and read. This is the final part of your education.

Buy and read:

"High probability trading". £9.50 on Amazon used and new
"Trading for a living" £28.67 on Amazon used and new
"Market Wizards" £6.99 on Amazon used and new
"Extraordinary popular delusions" £1.40 on Amazon used and new

Read these for 1-2 hours per day all throughout this month of live time but do so in the evening before bed. First two provide education, third is truly educational and inspirational. Fourth and final is for fun but very enlightening.

Right, its time to go for it with your live account.

You've spent approximately £1,000 on a setup that you have for LIFE.

You may have spent £5 per month on CNBC Plus (total: £15)

You may have spent around £300 per month on either Ran or CQG (CQG is not necessary as I've shown but lets assume you did subscribe to RAN (cost would be around £300 x 3 = £900 subscription charges)

You should have spent approx £120 on books that you have as a reference for LIFE.

You've got a wealth of information and experience and its cost you just over £2,000.

This leaves you £3,000 to fund a live account going forward with possibly £300 pm charges for subscription services.

This gives you plenty of margin to trade 1-2 lots in the futures market or you could try spread betting if you prefer not to directly scalp and instead want to run positions. You can sign up for an account with ProSpreads which is spreadbetting but with the advantage of having the order book. Bear in mind that prop firms mostly look down on spreadbetting because of the spreads and fact that the intermediary is in control of the price so they would rarely if ever offer you this option. However, spreadbetting will give you more bang for your buck and with, say, ProSpreads you have no execution issues only spread issues to overcome. e.g. commission. Commission is more expensive for the home trader so a pure scalper (literally ticking a tick or two) might struggle here but give it a go. If you are a pure scalper and could make money on sim then analyse whether it is the commissions that are killing you when you move across.

ANALYSE. That was the key word in the last sentence. Each morning, you will have read the paper to gauge sentiment. You will have watched the chart to see what others will be focusing on. You will have the order book and execution as a pro does. At 4pm when your day ends, go over what you did. Print charts. Mark entries. What was good. What was bad. Think. Review. Then do something else and go to bed refreshed.

Trade small. Don't get greedy. When you are in profit on your account, only scale up your size very slowly. 1's or 2's for the first week. When profitable hit the odd 3. Go back to 1's and 2's. Build SLOWLY. No one can discipline you at home. This is another problem you are not at at a firm. You don't have someone to give you a boll*cking when you act like a fool and steam in a 10 lot on a Non Farms number.

Impose a daily loss limit of £400. If its reached, CLOSE UP SHOP AND LEAVE THE OFFICE. This is what they do to you at firms. If you drop £2,000 in any amount of time, go back to sim and refine what you are doing until you are ready and confident to try again. This should be for at least 2 weeks or more. Some of the most profitable prop traders took 9 months or more on sim. You then have another crack with your remaining money. Again if you spread bet, the money will go further when you can trade at £5 per point rather than a 1 lot which in the FTSE is £10 per point. Don't start going in at £1 per point. It's tempting to think you have an advantage by trading very small but in my experience it takes a long time to scale up and can be damaging in the long run because of this. e.g. going from £1 - £2 is double the risk. £2 - £4 doubles it again. £4 - £8 is another big step and after all that, you are still trading at basically less than an amateur has when he puts in a 1 lot.

You have a routine and you need discipline.

Good luck.

 

[DashRiprock]

actually I just read the whole thing and honestly there are a few things that i agree with but most of that is balls IMO.

 

[the hare]

actually I just read the whole thing and honestly there are a few things that i agree with but most of that is balls IMO.

I'm inclined to agree.

Its exactly what someone who knew no better might come up with to keep a trainee busy for 6 months.

To suggest someone trades the odd 3 lot trade with a 3K account is possibly the most irresponsible nonsense that I've ever read on a trading forum. T2W you should be feckin ashamed to host this drivel.

 

[trader_dante]

I'm inclined to agree.

Its exactly what someone who knew no better might come up with to keep a trainee busy for 6 months.

To suggest someone trades the odd 3 lot trade with a 3K account is possibly the most irresponsible nonsense that I've ever read on a trading forum. T2W you should be feckin ashamed to host this drivel.

Agreed. But I think you've missed the point (as usual).

 

[bbmac]

Whatever the specifics are of a particular training style/plan to train...the more general point derived from Tom's post is that there is a lot of hard work (and sacrifice) ahead of anyone starting out both in terms of off and on screentime learning/practice, and that a plan is essential. This is little understood by the inexperienced who have been seduced by the get rich quick merchants. Get rich slowly is a more apt description of the business ?

G/L

 

[trader_dante]

Whatever the specifics are of a particular training style/plan to train...the more general point derived from Tom's post is that there is a lot of hard work (and sacrifice) ahead of anyone starting out both in terms of off and on screentime learning/practice, and that a plan is essential. This is little understood by the inexperienced who have been seduced by the get rich quick merchants. Get rich slowly is a more apt description of the business ?

G/L

Thanks BBMAC

In the event I didn't make it clear enough in the first post, this plan is not endorsed by me. It's not the way I would suggest structuring a new traders learning process.

It is simply an outline of what your routine will be if you happen to get into prop. The books I've listed are intended to summarise the "classroom training" aspect. The rest is very similar to what you will be doing in your own time.

People that are interested in what products you will trade, what tools you will use and what the learning process will be like, will find it useful.

I should also mention that the hares comment on risk is something I share myself but that doesn't change the fact that this is still the model that is provided.

The new traders are encouraged to do 2 lots at an absolute minimum and given a 10 lot straight off the bat.

All the while your "account balance" is never stipulated although it will say in the contract that at around 5k loss you can be asked to leave at their discretion.

You do the math ;-)

 

[arabianights]

I'm inclined to agree.

Its exactly what someone who knew no better might come up with to keep a trainee busy for 6 months.

To suggest someone trades the odd 3 lot trade with a 3K account is possibly the most irresponsible nonsense that I've ever read on a trading forum. T2W you should be feckin ashamed to host this drivel.

I don't really see the problem with it. It's mostly common sense but it isn't WRONG as such... basically it just says: watch the market for 3 months, read everything you can on it, and have a go.

Not earth shattering stuff but it doesn't have to be.

3k for a 3 lot is nuts on most instruments though (when starting out)... should be 5k for a 1 lot in most and probably 20k for a 1 lot in CL for example.

 

[the hare]

I don't really see the problem with it.

As you've already pointed out, the risk management aspects are insane. That was primarily the point I was making.

Whilst I'd probably advocate diving in and having a go, and committing full time to the endeavour, there's a complete lack of a framework in place to evaluate performance.

I know how I trade, and I know exactly how I'd train others to understand and impliment my particular edge. Allowing someone to fanny about unsupervised and hoping that they find something that might work isnt really an ideal approach. I grant you, thats the only approach available to most retail traders.

It seams to me that the majority of prop firms employ exactly the same model with their traders at a macro level, as I apply to individual trades on a micro level i.e, take a bunch of random punts, and fire the ones who underperform, and cash in on the 1 in 20 who do well either by luck or judgement.

Whilst its an entirely appropriate methodology, and probably a tried and tested methodolgy amongs prop firms, its a bit immoral when a firm starts charging contestants to play a game of chance, or passing off the methodology as market wisdom

There's a whole lot I dont like about the suggested "method", but T2W isnt really an appropriate forum to discuss it.

 

[DashRiprock]

well course the risk mgmt stuff is total bonkers, but there are other aspects of it that I think are balls too. I don't want to bring any more attention to traderdantes "private Forum" because he ain't giving me no royalties so I will either make suggestions on my Schlong thread, or I won't.

 

[Jason101]

Introduction

Most prop houses trade equities and bonds. They won't let you loose on currencies so forget about them for a start. You will be offered the FTSE or the Bund. Maybe the SMI.

Hi Tom,

I have heard this before, why are prop houses so keen on bonds and is there a common theme on holding times?

I am guessing no currencies due the leverage and the resulting choppiness and speed?

Thanks

Jason

 

[trader_dante]

Hi Jason,

The fact that no currencies are traded is nothing to with the leverage, choppiness or speed. As far as I am aware it is down to the fact that the traders use the order book to help them trade. You can get the book for FX futures but movements in the futures are heavily dependent on movements in the cash for which there is no centralised exchange to watch the order flow.

Not sure about the bonds. Most of the traders where I was traded the FTSE.

As far as holding times - we are talking seconds.

 

[SanMiguel]

So, basically prop is just what you could do by yourself. They basically shove you there and if you're any good keep you otherwise out.
Must be a nice earner for the prop companies.

 

[mattboffey]

Some interesting points in this, just wish i had the discipline to get up at 6.30

 

[Pazienza]

Some interesting points in this, just wish i had the discipline to get up at 6.30

F*** that sh1t. Just trade US futures (better anyway) and get up at noon.

 

[LittleKnown]

Paz you got a proper boner for futures, can you give some merits and such on these instruments

 

[Pazienza]

Paz you got a proper boner for futures, can you give some merits and such on these instruments

1. Traded on a proper exchange, transparent and reliable prices. None of your forex made-up bullsh1t based on some crap.

2. Low(ish) costs, very negoeshable.

3. Liquid (some more than others, but you can chuck anything at ES and get filled reeeeal nice-like).

4. Above all, awesome intra-day action. Seriously. Check it out if you don't believe my a$$. Very simple to manage trades (most of the time).

5. You can stay awake half the night getting smashed and f***ing trannies, and still be up the next day before the market gets going properly, so it will fit in with your lifestyle.

6. Very suitable for trading based on my approach, which is to basically look up the market's skirt and say "What the f*** is going on bitchez!".

7. Lots of good brokers to choose from. One p1sses on your head and tells you it's rainin'? Tell em to go f*** themselves, and move your account next door. Not like forex brokers, whose only purpose in life is to f*** you in the a$$.

Those are some of the more important advantages.

 

[Pazienza]

Forgot to mention.

8. Only men with big c0cks trade futures. If you haven't got a big one when you start, trading futures can make it grow by up to six inches. I already had a stonking dong when I started, but now it's grown so big I'm in danger of passing out every time I get a full lob on.

 

[redart]

lol @ no.6, made me chuckle
I want you to start a little trading chatroom.

 

[mattboffey]

Yes please start a chatroom