The Essential Language of Proprietary Trading
Proprietary trading, or “prop firm” trading, has become a significant avenue for traders seeking capital and leverage. As this industry evolves, a specialized vocabulary has emerged. Understanding these terms is crucial for anyone navigating the prop firm landscape, from aspiring funded traders to experienced professionals. This glossary aims to demystify 50 key terms, providing clear, concise definitions that reflect current industry usage as of our last verification on October 26, 2023.
For those looking to deepen their understanding of the prop firm industry, the article titled “20 Rules for Choosing a Challenge” offers valuable insights and practical guidelines. This resource complements the “Prop Firm Industry Glossary: 50 Terms Every Funded Trader Should Know” by providing essential criteria to consider when selecting a prop firm and navigating trading challenges. You can read the article here: 20 Rules for Choosing a Challenge.
Core Concepts in Prop Firm Trading
Prop Firm (Proprietary Trading Firm)
A company that provides capital to traders to execute trades in financial markets, with the firm retaining a portion of the profits. Traders typically do not use their own capital for trading but rather the firm’s.
Funded Trader
An individual who has successfully completed a prop firm’s evaluation process and is allocated capital to trade on behalf of the firm.
Evaluation (Challenge, Audition)
A multi-stage assessment process designed by prop firms to identify skilled traders. It typically involves trading on a demo account under specific rules and performance targets.
Demo Account
A simulated trading account that uses virtual money, allowing traders to practice strategies and familiarize themselves with a trading platform without financial risk. Used extensively in prop firm evaluations.
Live Account
A real trading account where actual capital (provided by the prop firm) is used to execute trades in live financial markets.
Capital Allocation
The amount of trading capital a prop firm assigns to a funded trader. This can vary based on the trader’s performance, evaluation tier, and firm policies.
Profit Split
The percentage distribution of trading profits between the funded trader and the prop firm. For example, an 80/20 profit split means the trader keeps 80% of the profits, and the firm retains 20%.
Payout
The process by which a funded trader receives their share of the trading profits from the prop firm. Payout frequency and methods vary between firms.
Scaling Plan
A program offered by some prop firms that allows successful funded traders to increase their allocated capital and potentially improve their profit split based on consistent positive performance.
Trading Platform
Software used by traders to access financial markets, analyze data, and execute trades. Common platforms include MetaTrader 4 (MT4), MetaTrader 5 (MT5), cTrader, and TradingView.
Broker
A financial institution that facilitates the buying and selling of financial instruments. Prop firms typically partner with specific brokers to execute their traders’ orders.
Leverage
The use of borrowed capital to increase the potential return of an investment. In prop trading, this means traders can control larger positions with a relatively smaller amount of margin.
Drawdown
A decline from a peak in an account’s equity. It’s often expressed as a percentage.
Evaluation and Risk Management Metrics
Profit Target
The specific amount of profit (often a percentage of the initial capital) a trader must achieve during an evaluation phase to qualify for the next stage or become funded.
Maximum Daily Drawdown (MDD)
The maximum amount an account’s equity can decline within a single trading day, calculated from the starting balance or peak equity of that day. Exceeding this limit typically results in failing the evaluation or account termination.
Maximum Total Drawdown (MTD, Max Trailing Drawdown, Max Absolute Drawdown)
The maximum permissible loss an account can incur from its highest point (peak equity) at any time. This can be a fixed percentage of the initial balance or a trailing percentage that moves up as the account makes new highs.
Account Reset
The option to restart an evaluation phase, usually for a fee, if a trader fails to meet the rules (e.g., hitting maximum drawdown or not reaching profit target within the time limit).
Trading Days
The number of active days a trader places a trade. Prop firms often have minimum or maximum trading day requirements for evaluations.
Minimum Trading Days
The lowest number of days a trader must place trades within an evaluation period to qualify. This prevents “lucky” trades from immediately passing an evaluation.
Time Limit
The maximum duration (e.g., 30 days) allowed to complete an evaluation phase. Some firms offer unlimited time.
Consistency Rule
A rule designed to prevent traders from passing an evaluation with a single large, lucky trade. It often stipulates that no single trade or day’s profit can account for an excessive percentage (e.g., 30-50%) of the total profit target.
Breakeven Rule
A rule, often implemented after a trader has made significant profits, stating that the maximum drawdown level will move up to the initial starting balance to protect accumulated profits.
Stop Loss
An order placed with a broker to buy or sell a security once it reaches a certain price, designed to limit a trader’s loss on a position. Some prop firms mandate strict stop-loss usage.
Take Profit (Limit Order)
An order to close a trade once a specific profit level is reached.
News Trading
The strategy of trading financial instruments around major economic news releases. Some prop firms restrict or prohibit news trading due to increased volatility and risk.
Weekend Holding (Overnight Holding)
The practice of keeping trades open over weekends or overnight. Many prop firms restrict or prohibit this due to increased market gap risk.
EAs (Expert Advisors) / Trading Bots
Automated trading software that executes trades based on predefined rules. Some prop firms allow EAs, others restrict them, and some have specific rules for their use.
Copy Trading
The practice of automatically copying trades executed by another, more experienced trader. Prop firm policies on copy trading vary, especially regarding copying trades from other prop firm accounts.
Financial Instruments and Market Access
Forex (FX)
The foreign exchange market, where currencies are traded. A primary market for many prop firm traders.
Indices
Financial instruments that track the performance of a basket of stocks, representing a specific market or sector (e.g., S&P 500, DAX 40).
Commodities
Raw materials or primary agricultural products that can be bought and sold, such as gold, silver, crude oil, and natural gas.
Cryptocurrencies
Digital or virtual currencies that use cryptography for security and operate independently of a central bank. Access to crypto trading varies significantly among prop firms.
Futures
Financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price. Some prop firms specialize in futures trading.
Stocks (Equities)
Shares representing ownership in a company. Access to individual stock trading through prop firms is less common than Forex or Indices.
Spreads
The difference between the bid (buy) price and the ask (sell) price of a financial instrument. Wider spreads mean higher trading costs.
Commission
A fee charged by a broker or prop firm for executing trades.
Slippage
The difference between the expected price of a trade and the price at which the trade is actually executed. It often occurs during periods of high volatility or low liquidity.
For those looking to deepen their understanding of the prop firm industry, the article on weekend holding offers valuable insights into the trade-offs that funded traders face. It discusses the implications of holding positions over the weekend and how it can impact trading strategies and risk management. This complements the essential terms outlined in the Prop Firm Industry Glossary, which every funded trader should familiarize themselves with. To explore this topic further, you can read the article here.
Operational and Support Terms
| Term | Definition | Relevance to Funded Traders |
|---|---|---|
| Prop Firm | A proprietary trading firm that provides capital to traders to trade financial markets. | Source of funding and trading platform for traders. |
| Drawdown | The reduction of one’s capital after a series of losing trades. | Important risk metric to monitor to avoid account termination. |
| Scaling Plan | A structured approach to increase trading capital based on performance milestones. | Allows traders to grow their funded accounts systematically. |
| Profit Split | The percentage of profits shared between the trader and the prop firm. | Determines trader’s earnings from successful trades. |
| Risk Management | Strategies to limit losses and protect trading capital. | Crucial for maintaining funded status and long-term success. |
| Challenge Phase | Initial evaluation period where traders prove their skills to earn funding. | First step to becoming a funded trader. |
| Consistency | Ability to generate steady profits over time without large losses. | Key factor prop firms look for in traders. |
| Leverage | Using borrowed capital to increase the potential return of a trade. | Amplifies both profits and losses; managed carefully by funded traders. |
| Scaling | Increasing position size or capital allocation as performance improves. | Helps traders maximize earnings while managing risk. |
| Trading Plan | A documented strategy outlining entry, exit, and risk parameters. | Essential for disciplined and consistent trading. |
KYC (Know Your Customer)
A mandatory process for financial institutions to verify the identity of their clients to prevent money laundering and other illegal activities. Required before payouts.
AML (Anti-Money Laundering)
Regulations and procedures designed to prevent financial crime and terrorist financing. Closely related to KYC.
VPN (Virtual Private Network)
A service that encrypts internet traffic and masks the user’s IP address. Some prop firms have policies regarding VPN usage, especially if it creates geographical inconsistencies.
IP Address
A unique numerical label assigned to every device connected to a computer network. Prop firms monitor IP addresses to identify potential rule breaches like multiple accounts from the same user or restricted regions.
Affiliate Program
A marketing arrangement where a prop firm pays a commission to individuals or entities who refer new traders to their platform.
Customer Support
The assistance provided by the prop firm to traders regarding their accounts, technical issues, rules, and payouts.
Discord Channel
A popular online communication platform used by many prop firms for community building, announcements, and support.
Dashboard
The personal online interface provided by a prop firm where traders can monitor their account metrics, performance, and progress during evaluations and live trading.
Trading Journal
A record kept by traders of their trades, including entry/exit points, rationale, and emotional state, used for performance analysis and improvement.
Psychological Edge
The mental discipline, emotional control, and resilience required to trade consistently and profitably under pressure. Crucial for funded traders.
Risk Management
The strategies and processes employed by traders to identify, assess, and control financial risks associated with their trading activities. Adherence to firm risk rules is paramount.
Backtesting
The process of testing a trading strategy using historical data to see how it would have performed in the past.
Forward Testing (Paper Trading)
Testing a trading strategy in real-time using a demo account without risking actual capital.
Psychological Drawdown
A period where a trader’s confidence and mental state suffer due to sustained losses, potentially leading to poor decision-making.
Redemption Period
A term used by some firms, where if a trader breaches a rule, they might be offered a chance to restart or continue under specific conditions, often for a fee or with reduced capital.
Navigating the Prop Firm Landscape: A Checklist
Understanding these terms is the first step toward a successful journey in proprietary trading. Beyond definitions, practical application and continuous learning are key.
- Review Firm Rules Carefully: Before enrolling in any evaluation, thoroughly read and understand the firm’s specific rules, especially regarding drawdown limits, profit targets, and prohibited trading styles.
- Practice on Demo Accounts: Utilize demo accounts to internalize the trading platform, test strategies, and become comfortable with the firm’s specific trading conditions.
- Understand Payout Structures: Be clear on profit splits, payout frequency, and available withdrawal methods before committing.
- Monitor Your Performance: Regularly check your trading dashboard and keep a personal trading journal to track your progress and identify areas for improvement.
- Prioritize Risk Management: Always adhere to the firm’s drawdown rules. Effective risk management is crucial for longevity as a funded trader.
- Stay Informed: The prop firm industry evolves. Keep abreast of changes in firm policies, new offerings, and industry best practices.
Sources
- Proprietary trading firm official websites (e.g., The Funded Trader, MyForexFunds, FTMO, FundedNext, etc.) – accessed October 26, 2023.
- Financial market glossaries (e.g., Investopedia, Babypips) – accessed October 26, 2023.
- Trader forums and communities discussing prop firm experiences – general sentiment and common terminology noted, not specific claims – accessed October 26, 2023.