Why I Stopped Trading Prop Firms - Part 2

Summary

In this video, the trader explains why they transitioned from proprietary trading firms to the stock market, highlighting the greater opportunities and inefficiencies in equities. Using verified examples from platforms like Kinfo, they show how small accounts can scale to millions through consistent skill and strategic trading. The discussion contrasts limited growth in prop firms with the higher potential returns in equities, emphasizing factors like trade frequency, directional moves, and market mispricing. The video also covers psychological challenges, opportunity costs, and the advantages of focusing on markets with clear inefficiencies, offering actionable insights for retail traders aiming for long-term growth.

Takeaways

• 😀 Prop trading often has strict rules, capital limits, and drawdowns, which can hinder a trader’s potential. Retail trading offers more freedom for experienced traders.
• 😀 Retail traders have demonstrated massive success, such as Jack Kellogg turning $1,500 into $14M and Eduardo growing $500 to $1.7M with a 72% win rate.
• 😀 Trading individual stocks offers more opportunities for significant gains, with over 66,000 instances of stocks rising 10% in the last 5 years compared to fewer moves in indices like the SPX.
• 😀 Indices like the SPX tend to move less frequently and have smaller price changes (2% max in 5 years), limiting profit opportunities for traders focused on high volatility.
• 😀 The potential for greater returns comes with more trading frequency—more trades result in more chances for profit, assuming consistent skill and strategy.
• 😀 The concept of market inefficiencies is crucial. Stocks often experience price mispricings, creating profitable opportunities for traders who can spot them, while indices tend to be more efficient and stable.
• 😀 Opportunity cost in trading means that the time spent mastering the prop firm rules could be better spent learning strategies that take advantage of the stock market's inefficiencies.
• 😀 A skilled retail trader can outperform hedge funds, which typically yield around 10–12% annually, by leveraging opportunities in individual stocks.
• 😀 Psychological factors play a significant role in trading. Struggling with the rules and limitations in prop firms can create unnecessary stress, while focusing on more volatile markets can provide greater rewards.
• 😀 Long-term growth in trading may favor retail strategies focused on equities, as they offer more frequent and larger market moves than indices or Forex pairs.
• 😀 To consistently succeed in trading, finding clear inefficiencies and capitalizing on mispricing is key. This is more likely in the individual stock market, where larger, more frequent moves provide higher expected value (EV).

Q & A

Why did the speaker decide to switch from prop trading to equities trading?

The speaker switched because the stock market offers more inefficiencies, mispricings, and directional opportunities, allowing traders to exploit larger price movements compared to prop firms or hedge funds.

How does SPX performance compare to individual stocks over the last 5 years?

SPX rose above 2% only 78 times in 5 years, whereas individual stocks had over 66,000 instances of 10% gains and 1,826 instances of 100% gains, showing greater opportunities in equities.

Who are some of the successful retail traders mentioned, and what were their results?

Examples include Jack Kellogg ($1,500 to $14M), Kyle Williams ($4K to $6M), Eduardo 'Edu' ($500 to $1.7M), and Christian Kouami ($5K to $80M), demonstrating that skilled retail traders can achieve extraordinary returns.

Why does the speaker argue that hedge fund returns are limited for comparison?

Most hedge funds do not consistently beat the market, often delivering only 10–12% annual returns, whereas some skilled retail traders can achieve much higher returns due to market inefficiencies.

What is meant by 'directional skew' and why is it important?

Directional skew refers to significant price movements in a particular direction. It is important because trades with directional bias have higher expected value (EV) compared to choppy, range-bound price action.

How does the speaker use a basketball analogy to explain trading strategy?

The analogy compares two players with the same accuracy but different numbers of shots. Similarly, a trader taking more trades in equities with the same win rate can generate higher overall profits due to volume and opportunity.

What role does opportunity cost play in choosing between prop trading and equities trading?

Opportunity cost includes time spent mastering a prop firm's rules versus learning equities trading. While prop trading may yield faster short-term gains, equities trading provides more long-term growth and skill development opportunities.

How does the speaker define market inefficiencies in equities?

Market inefficiencies occur when stock prices deviate significantly from fair value, often indicated by unusual volume spikes or news events, creating opportunities for traders to exploit price mispricings.

What is the psychological challenge of trading more efficient markets like indices or forex?

Efficient markets are dominated by sophisticated players, making it stressful to find consistent edges. Traders may struggle with market noise and limited mispricing opportunities compared to equities.

How can traders take advantage of choppy versus trending markets?

Traders can avoid range-bound assets with low expected value and instead focus on trending stocks or sectors with clear directional moves to maximize profits.

Why is third-party verification, like Kinfo, important for evaluating trader performance?

It provides credibility and proof of performance, showing that reported returns are real and not self-reported or exaggerated, which helps validate the success of retail traders.

What are the long-term advantages of equities trading compared to prop firms according to the speaker?

Equities trading allows traders to scale capital over time without restrictive rules, exploit larger price movements, and benefit from more frequent opportunities, potentially outperforming prop trading in the long run.