Prop Trading Glossary
A comprehensive reference of key terms and definitions used in proprietary trading and funded account programs. 31 terms and counting.
Account Balance
The total amount of money in a trading account, excluding unrealized profits or losses from open positions. This is different from equity, which includes unrealized P&L.
Challenge
The evaluation phase offered by prop trading firms where traders must demonstrate profitability within set rules (drawdown limits, profit targets) to qualify for a funded account. Also called an evaluation or audition.
Consistency Rule
A rule used by some prop firms that requires no single trading day to represent more than a specified percentage (often 30-40%) of total profits. This ensures traders generate returns consistently rather than relying on a single lucky trade.
Copy Trading
The practice of automatically replicating trades from another trader's account. Most prop firms prohibit copy trading between funded accounts, though copying from a personal account to a prop account may be allowed depending on the firm.
Daily Drawdown
The maximum loss allowed on a single trading day, typically set at 4-5% of the account balance. If this limit is breached, the account is terminated. Calculation methods vary: some firms use starting balance, others use the highest equity reached during the day.
Drawdown
The decline from a peak in account value to a trough. In prop trading, drawdown limits are the maximum permissible decline before an account is terminated. Drawdown can be measured as static (from initial balance) or trailing (from highest point reached).
Equity
The current value of a trading account including unrealized profits or losses from open positions. Equity = Balance + Unrealized P&L. Some firms calculate drawdown limits based on equity rather than balance.
Evaluation Fee
The one-time fee paid to a prop firm to participate in their evaluation/challenge. Fees range from $49 to $1,000+ depending on the account size. Some firms refund this fee with the first profit payout.
Expert Advisor (EA)
An automated trading program that runs on platforms like MetaTrader 4/5 to execute trades based on pre-programmed rules. Some prop firms allow EAs while others restrict or prohibit them.
Funded Account
A trading account provided by a prop firm after a trader passes the evaluation. The firm provides the capital, and the trader keeps a percentage (typically 70-90%) of profits generated.
Funded Trader
A trader who has successfully passed a prop firm's evaluation and is actively trading a funded account with the firm's capital.
High-Frequency Trading (HFT)
An automated trading strategy that executes a very large number of trades in extremely short timeframes (milliseconds). HFT is prohibited by most prop trading firms.
Leverage
The ability to control a larger position with a smaller amount of capital. Expressed as a ratio (e.g., 1:100 means $1 controls $100). Prop firms typically offer leverage ranging from 1:10 to 1:100 depending on the instrument and program.
Lot
A standardized unit of measurement for a trading position. In forex, a standard lot = 100,000 units, a mini lot = 10,000 units, and a micro lot = 1,000 units.
Margin
The amount of capital required to open and maintain a leveraged trading position. If equity falls below the required margin level, a margin call or forced liquidation may occur.
Maximum Drawdown
The total maximum loss allowed from the starting account balance before the account is terminated. Typically set at 8-12% for prop firm accounts. Can be static (fixed from start) or trailing (moves up with profit).
News Trading
The practice of opening trades around major economic data releases (e.g., NFP, CPI, interest rate decisions) to profit from the resulting volatility. Some prop firms restrict trading within minutes of these events.
Payout
The withdrawal of profits from a funded trading account. Payouts are typically processed on a regular schedule (bi-weekly or monthly) and subject to the firm's profit split percentage.
Pip
The smallest price movement in a forex pair, typically the fourth decimal place (0.0001) for most pairs, or the second decimal place (0.01) for JPY pairs. Used to measure price changes and calculate profit/loss.
Position Sizing
The process of determining how large a trading position to take based on account size, risk tolerance, and stop loss distance. Proper position sizing is critical for staying within drawdown limits.
Profit Split
The percentage of trading profits that the trader keeps. Standard splits range from 70% to 90%, with some firms offering scaling to 100%. For example, an 80% split on $10,000 profit means the trader receives $8,000.
Profit Target
The minimum profit required to pass an evaluation phase. Typically 5-10% of the initial account balance. Once reached, the trader advances to the next phase or receives a funded account.
Proprietary Trading Firm
A company that provides its own capital to traders. Also called a prop firm. Modern online prop firms evaluate traders through challenges and share profits with successful traders rather than employing them directly.
Scaling Plan
A program offered by many prop firms that increases a funded trader's account size and/or profit split based on consistent profitability over time. For example, FTMO increases accounts by 25% every four months for traders meeting specific criteria.
Slippage
The difference between the expected price of a trade and the actual execution price. Slippage commonly occurs during high volatility events and can cause losses to exceed the intended stop loss level.
Spread
The difference between the bid (sell) and ask (buy) price of a financial instrument. Spreads are a cost of trading that affects profitability, especially for scalping strategies. Wider spreads mean higher trading costs.
Static Drawdown
A drawdown model where the maximum loss limit is calculated from the initial account balance and does not change. If you start with $100K and have a 10% max drawdown, the limit is always $90K regardless of profits earned.
Stop Loss
A pre-set order that automatically closes a position when the price reaches a specified level, limiting the trader's loss. Proper stop loss placement is essential for risk management in funded accounts.
Swap
The interest charged or earned for holding a position overnight. Also called rollover. Swap rates vary by instrument and can be positive or negative. Some firms offer swap-free (Islamic) accounts.
Trailing Drawdown
A drawdown model where the maximum loss limit moves up (trails) as the account equity increases. More restrictive than static drawdown because profitable trades raise the minimum equity level that triggers termination.
Verification
The second step in a two-step evaluation process. Typically has a lower profit target (5% vs 10%) and longer time limit to confirm the trader's consistency. The same risk rules from the challenge phase apply.