The trading world is expanding and becoming more versatile as new investment strategies emerge and gain popularity. Today, we want to discuss a method that is receiving an excellent response from investors: Prop Trading futures.

We will explain their characteristics, advantages, disadvantages, and how to implement them in your prop trading firm.

Prop Trading Futures: what are they?

To explore the topic, we must understand the definitions of “futures” and “prop trading.” Doing so will help us grasp how proprietary trading firms that offer this type of investment to their clients operate.

First, we will define futures trading.

Futures are contracts for the sale and purchase between two interested parties. These contracts involve various assets listed on the stock exchange, such as stocks, commodities or raw materials, stock market indices, and more.

Prop Trading or Trading futures is unique because it is a purchase and sale contract that does not take place at the time the contract is created; instead, the parties set a specific future time to carry out the transaction when the contract expires.

Imagine, for example, that a trader enters into a futures contract for some commodity such as oil. Both parties agreed that the transaction would take place after three months. The interesting thing is that at the time of making the contract, both parties will fix the value at which the future transaction will take place.

So, even if the sale occurs in three months, both parties must pay the price they set today when creating the contract.

So, regardless of the asset’s price at the end of the stipulated period, the price remains unchanged. For example, if an investor sets an amount of 50€ for an asset that later rises to 60€, that investor will have earned 10€.

Conversely, if the asset has decreased in price, the counterparty will profit from the transaction.

How does Prop Trading work?

Now that we understand what futures are, we can explore how to utilize this resource in prop trading.

We must remember that proprietary trading is an investment modality in which a company provides the capital for the transactions. That is to say, the investor does not make movements with their own money but with the funds of a prop trading company.

As a result, the risk for the investor is low since there is no danger of losing their money. At the same time, it increases the company’s profits since it does not have to share them with anyone because it has placed 100% of the capital.

However, these companies hire experienced traders to manage their capital and execute transactions on their behalf, offering the traders a commission according to the results they generate.

In this case, Prop Trading futures involve contracts on underlying assets listed on the stock exchange using the prop trading firm’s capital.

Both parties will be obligated to make the purchase and sale on the day the contract expires and at the amount initially agreed upon, regardless of any market fluctuations of the asset during that period.

Both parties will negotiate mutually beneficial agreements while strictly adhering to the terms of the contract.

Advantages and disadvantages of futures trading

As is well known, every investment involves risks, especially when dealing with volatile assets or those that frequently change in value.

However, futures have several advantages that we can take into account:

• Estimates can be drawn about the future value of an asset based on the asset’s history. Thus, an investor might consider it a smart strategy to set a higher or lower price based on such data.
• Futures allow the purchase and sale price to be locked in, so the investor has assurance regarding the capital used in that transaction from the outset.
• Both parties are obliged to comply with the terms of the agreement, which adds seriousness and confidence to the agreement.
• In prop trading, investors do not provide capital, which minimizes risk.
• For prop trading companies, there is no ceiling on the profits they can make on futures, as they are the only partner. 

Despite all these benefits, it is crucial to keep in mind that there are some risks when it comes to Prop Trading futures:

• No party can predict the asset’s value at the end of the contract, so the risk of profit or loss persists.
• Since the company provides 100% of the capital, it enjoys all the profits but bears all the losses.
• Investors encounter minimal risk since they do not use their capital but do not earn substantial profits as the company does. 

In summary, understanding the pros and cons of Prop Trading futures is essential before deciding to implement this investment model in your company.

Smart Brokers Solutions: your ally to set up your prop trading firm from scratch

If you want to become your broker but are unsure of the process, SBS is here to help.

Not only do we provide you with all the technology and resources you need to get your brokerage up and running, but in case you need it, we also help you set up your prop trading company from scratch, taking care of all the administrative processes.

We help you set up your broker in record time and provide you with all the technological resources to start operating it.

Our solutions allow you to access the Forex markets and easily make moves. It features a control panel that enables you to manage your clients and monitor all their transactions.

We have state-of-the-art technology and the highest security protocols to protect your capital in fully customizable funding accounts.

Do not hesitate any longer—contact Smart Broker Solutions and let us elevate your trading business to the next level.