Prop firm glossary: short definitions

Short definitions, no promises. Terms vary from one firm to another: the definition that counts is the one in the terms of the firm concerned.

Balance

Account amount excluding the result of open positions.

Challenge

Paid evaluation a trader must pass to obtain a funded account. It has one or more phases, a profit target and loss limits. The name and content vary from one firm to another.

Consistency rule

Rule that limits the share a day or a trade may represent in total profit. Formula and penalty are defined by the firm.

Copy trading

Automatic replication of one account's positions on one or more other accounts. A firm's terms may prohibit or restrict it.

Counterparty risk

Risk that the other party fails to meet its obligations. For a prop firm trader: depending on the firm to apply the rules and to pay.

Drawdown

Maximum allowed drop of the account before it is closed. Depending on the firm, it is measured on balance or equity, and may be static or trailing. See rules explained.

End-of-day

Describes a rule assessed at the close of the day, as opposed to an intraday rule. The closing time is defined by the firm.

Equity

Balance plus or minus the unrealized result of open positions. Some limits are measured on equity, others on balance.

Funded account

Status granted after the evaluation. It does not say, by itself, whether the account is simulated or live: see simulated or live account.

Hedging

Taking opposite positions to offset a risk. The terms may prohibit it, notably across several accounts.

Intraday

Describes a rule assessed continuously during the day, unrealized results included.

KYC

Identity check (know your customer) requested before an activation or a payout. Documents and delays are defined by the firm.

Leverage

Ratio between the size of a position and the capital committed. It amplifies gains and losses alike.

Live account

Account whose orders are sent to an intermediary or a market, with real capital behind them. The firm's terms state who holds the account.

Lot

Unit of position size (foreign exchange). Other markets speak of contracts or units; the value of a lot depends on the instrument.

Martingale

Method that increases position size after a loss. It brings a loss limit closer faster; the terms may prohibit it.

Maximum daily loss

Limit on the loss over one day. The reset time and the calculation base (balance, equity) are defined by the firm.

Maximum overall loss

Limit on the cumulative loss since the account started. See drawdown.

Minimum trading days

Minimum number of trading days required to validate a phase or request a payout. The definition of a "trading day" varies.

News trading

Trading close to economic announcements. The terms may limit or prohibit it within a defined window.

Overtrading

Trading more than your plan provides for. Volume increases exposure and transaction costs.

Payout

Withdrawal: sum paid to the trader out of profits, according to the firm's terms (minimum profit, trading days, delay, identity check).

Payout threshold

Minimum amount or profit to reach before a payout can be requested. Defined by the firm.

Phase

Step of an evaluation, with its own targets and rules. An evaluation has one or more phases.

Pip, point and tick

Units of price change. Their definition and value depend on the instrument.

Position size

Number of lots, contracts or units of a position. Derived from the risk per trade and the stop distance.

Profit split

Division of profits between the trader and the firm, set by the firm's terms. See rules explained.

Profit target

Gain to reach to validate an evaluation phase, expressed as an amount or as a percentage of the account.

Prop firm

Proprietary trading firm. In the challenge model, it sells access to an evaluation and, if passed, to a funded account.

Reset

New attempt after a failure, generally for a new fee. The terms state the price and the conditions.

Revenge trading

Re-entering a position after a loss to "win it back", without following your plan. See beginner mistakes.

Risk per trade

Maximum planned loss if the stop is hit, as an amount or as a percentage of the account. See risk management.

Risk/reward ratio

Ratio between the targeted gain and the maximum planned loss on a trade. It says nothing about the probability of winning.

Scaling plan

Plan that changes the size of the funded account, or other parameters, according to criteria set by the firm.

Simulated account

Account (demo) whose orders are placed in a simulation environment; the balance is a figure managed by the platform. A payout then depends on the firm's terms.

Slippage

Difference between the requested price of an order and its execution price.

Spread

Difference between the buy price and the sell price of an instrument. It is a cost on every transaction.

Static drawdown

Drawdown whose loss threshold stays fixed for the life of the account.

Stop loss

Order that closes a position when a defined loss is reached. It can be filled at a less favorable price (see slippage).

Take profit

Order that closes a position when a defined gain is reached.

Time limit

Maximum time to reach a phase's target. A firm may not set one.

Trailing drawdown

Drawdown whose threshold rises with the highest level reached by the account. The remaining room shrinks when the account rises and then falls back.

Unrealized result

Gain or loss on positions still open, not yet realized. It counts in equity.