9 Things Every Prop Trader Should Know

"You have to be willing to adapt," said Lombardo. "Adapt to the market. Adapt to the environment."

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Milani reiterated Lombardo's advice about being adaptable but added that prop traders should also be prepared for anything.

He also said that prop traders should be educated and knowledgeable.

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Some people never want to be wrong. That's okay in some scenarios, but it will prove to be a losing behavior in this business.

"This is a big one," said Lombardo. "[Be] willing to know when you're wrong and getting out of a position in a timely fashion and not letting a small loss turn into a disaster."

All too often, traders fall into a trap. Instead of cutting their losses ASAP, Lombardo said that traders "tend to let their losers become much, much bigger than their winners."

He said that this is especially a problem for new traders.

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Lombardo said that there are times when you "definitely" shouldn't trade.

During the interview, for example, volatility was high. But that doesn't mean it will be by the time you see this slideshow.

"There are definitely certain times of the day where I do not get up from my computer," said Lombardo. "There are other days when I'm off my computer within two hours or so after the market kind of slows down."

Lombardo said that this goes back to knowing how to adapt.

"But knowing when to trade is just as important as knowing how to trade," he added. "Being in the right names that sort of match your trading style and personality -- I think that's become a key aspect.

"Some people who are conservative in nature should not be trading these higher-risk names. They can get into a trap if they're not used to that volatility."

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"One of the most important things for our guys is that they're prepared," said Milani. "They're doing their reading, they're up on current market events, they know which stocks are moving and which ones aren't, so they're ready."

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"Just as important as knowing when to get out of a loser is knowing when to hold on to a winner," said Lombardo. "Your winners cannot be equivalent to your losers.

"You absolutely have to maximize a winner either by holding on longer or increasing your share size, making your position bigger."

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"I think it's really important for a prop trader to understand the dynamics of the market that they're trading in right now," said Lombardo. "The way the market is moving now."

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Milani said that traders need to know about the algorithms and know who else is in the market.

"Knowing if your stock is held by institutions," he added. "Knowing if there's a lot of short interest in the name. Knowing that if it's a very high volatility stock that has a lot of algorithms in it, you're going to be competing against those guys.

"I would think that knowing who the other players are in whatever industry, whatever segment, whatever ETF you're in is a big part of it rather than just expecting that each stock trades the same.

"Each stock almost has a personality. Apple (NASDAQ: AAPL) trades very differently now than it's going to when it splits seven for one. Google (NASDAQ: GOOG) trades different from Netflix (NASDAQ: NFLX). So because each of these names is made up of who's trading it -- whether it's institutions, algorithms or whoever it is -- I think part of it is knowing the other players in your stock and being able to adapt because, like I said, each stock has its own personality."

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Traders need to brace themselves for the psychological side effects of trading.

"Psychology is a huge part of trading," Lombardo warned. "There are certain psychological issues that arise when a trader comes in and he's ready to push the buttons, and there's all these types of fear and emotions that will overcome a trader when they're in a position.

"Psychology plays a big part. Understanding that part and how emotional it is and removing the emotions, taking the emotions out of trading, is a huge, huge benefit for any prop trader -- learning how to take emotions out of it by concentrating on the price action rather than your PnL."

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