Prop Firm Glossary

Trailing Drawdown

A maximum loss threshold that moves upward as your account reaches new equity highs. Unlike static drawdown, the floor rises with profits, meaning gains raise the minimum balance you must maintain.

Static Drawdown

A fixed maximum loss threshold set at account opening that never moves, regardless of how much profit you accumulate. Your drawdown floor stays at the same level for the lifetime of the account.

Daily Loss Limit

The maximum amount you can lose in a single trading day before your account is flagged or terminated. This resets each day and is separate from your overall maximum drawdown.

Drawdown Floor

The minimum account balance or equity level before a prop firm terminates the account. If your balance or equity touches this level, the account is immediately closed and the evaluation or funded status is lost.

Equity-Based Drawdown

A drawdown calculation method that includes unrealized (open) trade profits and losses in the account value. Your equity fluctuates with every tick while positions are open, making this stricter than balance-based drawdown.

Balance-Based Drawdown

A drawdown calculation method that only considers closed trade results, ignoring unrealized profits and losses from open positions. Your balance only changes when trades are closed.

EOD Drawdown (End-of-Day Trailing)

A trailing drawdown variant where the floor only updates at the end of each trading day based on the closing balance. Intraday profit spikes do not permanently raise the floor, making it more forgiving than intraday trailing.

Intraday Drawdown (Real-Time Trailing)

The strictest trailing drawdown variant where the floor moves upward tick-by-tick as your equity reaches new highs during the trading session. Every unrealized profit spike permanently raises the minimum balance required.

Drawdown Recovery

The process of recovering account balance after a losing period. Drawdown recovery is asymmetric -- a 10% loss requires an 11.1% gain to recover, and a 50% loss requires a 100% gain. In prop trading, recovery must happen within the remaining drawdown room.

Profit Target

The minimum profit a trader must generate to pass an evaluation phase or qualify for a payout. Once hit, the trader advances to the next phase or receives their funded account.

Consistency Rule

A rule requiring that no single trading day accounts for more than a certain percentage of total profits. Designed to prevent lucky one-day windfalls from passing evaluations.

Evaluation Phase

A simulated trading period where aspiring funded traders must demonstrate profitability and risk management within defined rules. Passing the evaluation earns access to a funded account.

Funded Account

A trading account provided by a prop firm after passing the evaluation, where the firm supplies the capital and the trader keeps a percentage of profits. The trader does not risk their own money beyond the challenge fee.

Prop Firm (Proprietary Trading Firm)

A company that provides traders with capital to trade financial markets in exchange for a share of profits. Modern retail prop firms charge an evaluation fee and fund traders who demonstrate consistent profitability.

Challenge Fee

The upfront cost paid to a prop firm to attempt an evaluation. This fee grants access to the simulated trading environment and is typically refunded after the trader passes and receives their first funded payout.

Payout Split

The percentage of trading profits that a funded trader keeps versus what the prop firm retains. Typical splits range from 50% to 100%, with most firms starting at 80% and offering increases for consistent performance.

Scaling Plan

A program offered by prop firms that increases your account size and/or profit split as you demonstrate consistent profitability over time. Scaling rewards long-term funded traders with larger capital allocations.

News Trading Restriction

A rule prohibiting or limiting trading during major economic announcements like FOMC, NFP, and CPI releases. Firms restrict news trading because extreme volatility can cause rapid drawdown breaches.

Overnight Holding

Keeping trading positions open past the daily market close. Some prop firms require all positions to be flat (closed) before the end of the trading session, while others allow positions to be held overnight.

Weekend Holding

Keeping trading positions open from Friday market close through Monday market open. Weekend holding carries gap risk because markets can move significantly over the weekend due to geopolitical events.

Max Contracts

The maximum number of futures contracts or forex lots a trader can hold simultaneously, as specified by the prop firm rules. This limit prevents excessive exposure and protects against catastrophic losses.

Copy Trading

A method where trades are automatically replicated from one account to another. Most prop firms prohibit copy trading between multiple funded accounts, as it violates their terms of service around independent trading.

EA Trading (Expert Advisor)

Using automated trading algorithms (Expert Advisors) to execute trades on a prop firm account. Most major prop firms allow EAs, but some impose restrictions on high-frequency strategies or require disclosure.

Position Sizing

The process of determining how many contracts, lots, or shares to trade per position based on your account size, risk tolerance, and the distance to your stop-loss. Proper position sizing is the foundation of risk management.

Lot Size

The standardized quantity of a financial instrument in a single trade. In forex, 1 standard lot = 100,000 units of the base currency. In futures, lot size varies by contract (1 ES = $50/point, 1 NQ = $20/point).

Pip Value

The monetary value of a one-pip movement in a forex pair for a given lot size. For USD-denominated pairs, 1 pip on a standard lot is approximately $10. Pip value varies for cross-currency pairs.

Tick Value

The monetary value of a one-tick movement in a futures contract. A tick is the minimum price increment for a futures instrument. ES (E-mini S&P 500) has a tick value of $12.50, NQ (E-mini Nasdaq) is $5.00.

Leverage

The ratio of trading exposure to actual capital required. In forex, leverage can be 1:100 or higher, meaning $1,000 controls $100,000 of currency. In futures, leverage is built into the contract specification through margin requirements.

Margin Call

A notification or automatic action triggered when your account equity falls below the required margin level. In prop firm trading, margin calls are effectively replaced by drawdown limits -- the firm terminates the account rather than requesting additional funds.

Risk-Reward Ratio

The relationship between the potential loss (risk) and potential gain (reward) on a trade, expressed as a ratio like 1:2 or 1:3. A 1:2 ratio means you risk $1 to potentially make $2.

Win Rate

The percentage of trades that result in a profit. A 60% win rate means 6 out of every 10 trades are winners. Win rate alone does not determine profitability -- it must be considered alongside risk-reward ratio.

Break-Even Point

The account balance or number of trades at which cumulative profits equal cumulative losses plus costs (challenge fees, commissions). In prop trading, this is the minimum performance needed to recover your initial investment.

Risk Per Trade

The maximum dollar amount or percentage of account balance you are willing to lose on a single trade. Most prop firm traders risk 0.5-2% per trade to ensure they can withstand losing streaks without breaching drawdown limits.

Stop-Loss

A pre-set order to close a position at a specified price to limit losses. In prop trading, stop-losses are not optional -- trading without them means a single adverse move could breach drawdown limits and terminate the account.

Compound Growth

Growing your position size proportionally as your account balance increases, so profits generate larger future profits. In prop trading, compounding must be balanced against drawdown limits -- increasing size too fast amplifies losses.

Take-Profit

A pre-set order to close a position at a specified profit target. In prop trading with trailing drawdown, take-profit orders are essential to lock in gains before unrealized profits raise the drawdown floor unnecessarily.

Fair Value Gap (FVG)

A price imbalance on a chart where a candle's range does not overlap with the candle two bars prior, creating a "gap" in fair value. Traders expect price to revisit and fill these gaps, using them as entry zones.

Order Block

The last opposite-direction candle before a significant price move, believed to represent institutional accumulation or distribution. Traders use order blocks as support/resistance zones where smart money is likely to defend price.

Market Structure

The pattern of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend) that defines the current directional bias. A break of structure (BOS) occurs when price violates the most recent swing point, signaling a potential trend change.

Liquidity Sweep

A price movement that briefly breaks past a key level (swing high/low, equal highs/lows) to trigger stop-losses and pending orders resting at those levels, before quickly reversing. Also called a "stop hunt" or "liquidity grab."