Most Popular Prop Trading Strategies

Because proprietary trading is a high-risk, high-reward activity, using the right trading strategy is paramount for reducing potential losses and maximizing your profits. Successful traders carefully follow market trends and employ one or multiple strategies on a daily basis to execute trades with the highest degree of efficiency possible.

Most Effective Strategies Used by Prop Traders

These are some of the best prop trading strategies for 2024:

News Trading

Trading in news is a highly popular strategy among prop traders, especially now when the market is shifting heavily into volatility trading. 

News events have the potential to impact the stock market and asset prices in a drastic way, and news trading prop traders use this strategy to profit from the short-term volatility and major price movements that may happen after a certain news event.

One example of a news event that is commonly targeted by news traders are public company quarterly reports, and the impact these reports have on the company’s stock price. The trader will enter into either a short or a long position in anticipation of the market reaction to the company’s quarterly report, and will usually close it in a few minutes or hours after the news event. 

Because these trades are based on speculation, they carry with them a high level of risk and uncertainty, which is why news traders usually employ stricter risk management methods like position sizing and tight stop-loss orders.

Trend Following

Another highly volatile and popular prop trading strategy is trend following, which involves analyzing and identifying market trends before taking a short or a long position and setting benchmarks for the entry and the exit points in a trade. This strategy works best in historically stable markets with clear trends, but becomes much riskier in choppy markets with shorter trends and unclear patterns. 

Trend following can be applied to a variety of assets like stocks, commodities, futures and currencies, and prop traders that employ this strategy can use technical analysis and automated algorithmic trading software to identify market trends. Due to the high level of volatility, traders also employ much stricter risk management measures to minimize the potential risks and losses. 

Breakout Trading

The breakout strategy is another highly popular choice among prop traders, with the aim of profiting from sudden and sharp asset price movements which break through resistance or support levels. 

Traders employ technical analysis and automation through algorithms to identify potential breakouts and to enter a position once the breakout happens in order to ride in the breakout’s direction until the asset reaches their price target. 

Because of a high possibility of false breakouts, successful traders also set strict stop-loss orders or shift in and out of positions to reduce potential losses. The breakout strategy can be used in a number of asset classes, such as stocks, currencies, commodities and futures.

Scalping

Scalping is one of the more time-demanding prop trading strategies, as it involves trading on a minute-to-minute basis, with multiple trades being made throughout the trading day in order to profit from minor, real-time asset market movements. 

With scalping, there are no trades held overnight, and prop traders have to constantly evaluate each asset’s performance in order to successfully and quickly enter and exit positions. To achieve success, traders use technical analysis and a variety of indicators, including Bollinger Bands, moving averages and Moving Average Convergence/Divergence (MACD), and they are allowed to use order flow data and Level II quotes to gauge market depth.

Scalping is a high-risk strategy that requires high win rates in order to be successful, which is why traders should employ tighter stop-loss orders and position sizing to minimize the potential losses.

Position Trading

The position trading strategy is a long-term approach to proprietary trading, and is essentially the same as trend following, with the difference being that position traders invest in trends that they believe will continue over a longer period of time.

Position trading requires a much deeper knowledge and understanding of market trends, as it involves holding a position for months or years after entering it. Most position traders make less than ten trades per year, and are not concerned with short-term movements or news events as most day traders are.

Successful position traders have a deep understanding of macroeconomic indicators and industry trends, and mostly make trades during bull market periods. They employ both technical and fundamental analysis and use strict risk management methods and asset allocation rules to minimize losses, which can be potentially huge.

Swing Trading

The swing trading strategy is a middle-of-the-road approach to trend following, with traders holding their positions for days or weeks at a time, as long as a positive trend lasts. Swing traders primarily rely on technical analysis, but they also sometimes employ fundamental analysis to analyze price patterns and market trends.

Most successful swing traders only seek to capture a fraction of an expected price move, exiting a positive trend position before a predicted reversal. This is why the average profit target in swing trading is set at around 10%, as swing traders opt for a higher number of small wins in a larger amount of trades in order to amass profits over a period of time. 

Because profit margins are smaller than with some other prop trading strategies, it is important to keep your potential losses small as well, which is why using a 3% stop loss is recommended for long-term success. 

In Conclusion

Adopting the right strategy and managing risk is essential to becoming a successful prop trader in the long run, whether you want to trade in a dynamic, fast-paced environment, or if you opt for  a more long-term trading style.