prop firm risk control question

N

newguy05

Can someone clarify this for me.

1) newbie deposit $25k into a prop firm, gets $1m leverage
2) newbie shorts $1m, market moves against him big, he get caught in a deer in the headlight moment.


How do you risk manage that? i know each prop firm will monitor all the trade etc, but the move up/down could happen in seconds. Is the risk controller literally staring at the monitor "daytrading" along side the traders?


And lets say the newbie loses 100k in his 25k account, and he has no money left, does the prop firm take the rest 75k hit? do they sue him? drag him into a dark room and break his legs? :D
 
For starters, newbie would not be allowed to short 1mm even if he has the leverage.

Also, props have software that limits the size of trades that anyone can enter for any single stock, so that in effect helps diversify newbie's risk.

Software also has feature to auto-liquidate when account equity reaches certain level. It is in your contract that you sign with the prop that they can sell your position whenver they feel there is too much risk, whether you like it or not, even if the trade were to go your way. You have no recourse. What determines risk thresholds? That is subjective, i.e. can't have more than 100 or 1000 share lots, or warning goes off when account down 25% and auto liquidate when account down 50%. A prop is not going to take a hit unnecessarily. You will get the hit first.
 
Quote from newguy05:

Can someone clarify this for me.

1) newbie deposit $25k into a prop firm, gets $1m leverage
2) newbie shorts $1m, market moves against him big, he get caught in a deer in the headlight moment.


How do you risk manage that? i know each prop firm will monitor all the trade etc, but the move up/down could happen in seconds. Is the risk controller literally staring at the monitor "daytrading" along side the traders?


And lets say the newbie loses 100k in his 25k account, and he has no money left, does the prop firm take the rest 75k hit? do they sue him? drag him into a dark room and break his legs? :D
More...

Not much breaking of legs these days, but we do have a big desert here in Las Vegas, LOL.

Traders are professionals, and we hope that they like their money...and that they will not just be cowboys. This is why having a bit of money up themselves helps "control the urges" of some new traders.

After proper training, and with good self control, newer traders seem to hold their own, risk wise. If a trader, no matter how long they've been with us, is down 10% of their account balance, they pop up on risk, and we analyze and then discuss plans with the trader. We contact fewer than 5 traders a month I would guess. Very rare.

Using the capital to engage in certain strategies often times leads to "lower risk" than some other things traders tend to get involved in on a retail level.

Trading is a business, and we all do our best to treat it that way.

All the best,

Don
 
Quote from Don Bright:

If a trader, no matter how long they've been with us, is down 10% of their account balance, they pop up on risk, and we analyze and then discuss plans with the trader. We contact fewer than 5 traders a month I would guess. Very rare.
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Hi don, i know it's a very rare situation. But is the risk control really just taking a bet that the trader doesnt do anything stupid? For example, you said if the trader is down 10%, it pops up on controller screen, gets analyze, discuss etc. But at that time, the position could be dropping rapidly to -20%, -30% etc within seconds...

How do you manage that? And even if the auto stop loss monitors kick in to liquid at -20% for example, the trader could still lose 200k which is way more than his base 25k.

Do prop firms just chalk this up as something that happens very very rarely and take a bet no trader there would be that stupid or unlucky to pick such a bomb stock?

thanks
 
Each trade of each trader is watched. Depending on the firm the software can be set to not allow excessive leverage in any one instrument. Prop firms have hundreds of accounts, not thousands, so it is not that hard to keep a close eye on the handful that is most at risk. With a few mouse clicks the manager can shut down the trader and liquidate. It is a very rare occurrence when a trader's account goes debit. The firms realize that it is a possibility and do everything they can to prevent it, exactly the same as retail does. Anyone with a retail futures account can sell naked index options where the margin is not anywhere close to enough to protect the firm in case of a disastrous move, but they are still allowed to do it. Whether or not the trader is responsible for the debit is a legal question with regard to the individual's contract.
 
Quote from newguy05:

Can someone clarify this for me.

1) newbie deposit $25k into a prop firm, gets $1m leverage
2) newbie shorts $1m, market moves against him big, he get caught in a deer in the headlight moment.


How do you risk manage that? i know each prop firm will monitor all the trade etc, but the move up/down could happen in seconds. Is the risk controller literally staring at the monitor "daytrading" along side the traders?


And lets say the newbie loses 100k in his 25k account, and he has no money left, does the prop firm take the rest 75k hit? do they sue him? drag him into a dark room and break his legs? :D
More...


First it's not a good idea to give a trader with only 25k to their name 1 million in bp.


Second why their legs? They can still trade, i could think of better way.:D

If you have your 7 up they will hold it most times but i have seen them eat it also, it depends.
 
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