Whether you’re preparing to join a prop firm or have already started trading a funded account, understanding the language of proprietary trading is essential. Prop firms use specific terminology to define account rules, performance requirements, and risk limits. Knowing what these terms mean can help you avoid rule violations, make informed decisions, and navigate the evaluation process with confidence. This guide explains the most common prop trading terms every trader should know.
Common Prop Trading Terms Every Trader Should Know
Let’s see:
What Is Prop Trading?
Proprietary trading, often referred to as prop trading, is a model where traders use a firm’s capital instead of their own. Rather than risking personal funds, traders complete an evaluation or obtain an instant funded account, then trade according to the firm’s rules. In return, traders receive a percentage of the profits they generate.
Since every prop firm has its own trading conditions, understanding industry terminology is the first step toward becoming a successful funded trader.
Evaluation Challenge
An evaluation challenge is an assessment that traders must complete before receiving access to a funded account. During the evaluation, traders must meet profit targets while staying within the firm’s risk parameters.
Evaluation models vary between firms and may include one-step, two-step, or multi-step challenges.
Funded Account
A funded account is a trading account backed by a prop firm’s capital. Once a trader successfully completes the evaluation, or purchases an instant funding program, depending on the firm’s model, they receive access to this account.
Although traders use the firm’s capital, they must continue following the firm’s trading rules.
Instant Funding
Instant funding allows traders to access a funded account immediately without completing a traditional evaluation challenge.
These accounts usually have stricter risk limits, smaller profit splits initially, or different trading conditions compared to evaluation-based accounts.
Profit Target
The profit target is the percentage or dollar amount a trader must earn during an evaluation phase to progress to the next stage or receive a funded account.
For example, a firm may require an 8% profit target during Phase 1 and a 5% target during Phase 2.
Profit Split
The profit split refers to how trading profits are shared between the trader and the prop firm.
Common profit splits include:
- 70/30
- 80/20
- 90/10
- Up to 100% during promotional periods or after meeting specific milestones
A higher profit split means the trader keeps a larger share of generated profits.
Daily Drawdown
Daily drawdown represents the maximum amount a trader can lose during a single trading day.
If this limit is exceeded, the account may be breached, even if the trader remains profitable overall.
Many firms reset the daily drawdown at the beginning of each trading day, while others use an equity-based calculation that changes throughout the day.
Maximum Drawdown
Maximum drawdown is the largest overall loss allowed on an account from its starting balance or highest recorded equity, depending on the firm’s rules.
Exceeding the maximum drawdown typically results in account termination.
Understanding how a firm calculates maximum drawdown is one of the most important aspects of risk management.
Static Drawdown
A static drawdown remains fixed throughout the life of the account.
For example, if a $100,000 account has a $10,000 static drawdown, the account balance cannot fall below $90,000 regardless of any profits earned.
Trailing Drawdown
A trailing drawdown moves upward as the account reaches new equity highs.
As profits increase, the minimum allowable account balance also rises, helping firms manage risk while rewarding consistent performance.
Some firms stop trailing once the account reaches the starting balance, while others continue throughout the account’s lifetime.
Leverage
Leverage allows traders to control larger positions using less capital.
For example, 1:100 leverage means a trader can control $100,000 in market exposure with only $1,000 of margin.
While leverage increases potential returns, it also magnifies losses.
Margin
Margin is the amount of capital required to open and maintain a leveraged position.
If available margin becomes too low, traders may receive a margin call or have positions closed automatically by the broker.
Stop Loss
A stop loss is an order placed to automatically close a trade if the market reaches a specified price.
Using stop losses is one of the most effective ways to manage risk and stay within a prop firm’s drawdown limits.
Take Profit
A take profit order automatically closes a trade once a predetermined profit level is reached.
It helps traders lock in gains without continuously monitoring the market.
Risk-to-Reward Ratio
The risk-to-reward ratio compares the amount a trader is willing to lose against the potential profit on a trade.
For example:
- Risking $100 to make $200 equals a 1:2 risk-to-reward ratio.
- Risking $50 to make $150 equals a 1:3 ratio.
Many experienced traders seek setups with favorable risk-to-reward ratios rather than simply aiming for high win rates.
Lot Size
Lot size refers to the volume of a trade.
In forex markets:
- Standard lot = 100,000 units
- Mini lot = 10,000 units
- Micro lot = 1,000 units
Choosing the correct lot size is essential for controlling risk.
Equity
Equity is the real-time value of a trading account.
It is calculated as:
Account Balance + Floating Profit/Loss = Equity
Many prop firms base their drawdown calculations on equity rather than account balance.
Balance
Balance represents the amount in a trading account after all open positions have been closed.
Unlike equity, balance does not include unrealized profits or losses from active trades.
Floating Profit and Loss (Floating P/L)
Floating profit and loss refers to the unrealized gains or losses on open positions.
These values fluctuate continuously as market prices change.
Scaling Plan
Some prop firms reward consistent traders with scaling plans.
A scaling plan gradually increases account size after traders meet performance requirements over time.
For example, a trader may grow from a $50,000 account to $100,000 or more after demonstrating consistent profitability and disciplined risk management.
News Trading
News trading involves opening positions during major economic announcements such as:
- Interest rate decisions
- Inflation reports
- Employment data
- GDP releases
Some prop firms allow news trading, while others prohibit trading within a specified time before or after major economic events.
Overnight Holding
Overnight holding means keeping trades open after the trading day ends.
Not every prop firm permits overnight positions, particularly on certain account types or financial instruments.
Weekend Holding
Weekend holding refers to leaving positions open when markets close on Friday until they reopen on Sunday or Monday.
Some firms restrict weekend holding because of potential price gaps that may occur while markets are closed.
Consistency Rule
Certain prop firms require traders to demonstrate consistent performance rather than generating most profits from a single trade.
A consistency rule may limit the percentage of total profits that can come from one trading day or one position.
Payout
A payout is the withdrawal of trading profits from a funded account.
Payout schedules differ between firms and may be:
- Weekly
- Bi-weekly
- Monthly
- On-demand after meeting eligibility requirements
Trading Journal
A trading journal is a detailed record of every trade taken.
Many successful traders use journals to analyze:
- Entry and exit decisions
- Risk management
- Emotional discipline
- Strategy performance
- Overall consistency
Maintaining a journal can help identify strengths, weaknesses, and recurring mistakes.
Prop trading offers traders the opportunity to access larger amounts of capital without risking substantial personal funds. However, success depends on more than finding profitable trades. Understanding the terminology used by prop firms is equally important, as these terms define the rules, expectations, and risk limits that govern every funded account.
Whether you’re comparing prop firms, preparing for an evaluation challenge, or managing a funded account, becoming familiar with concepts such as drawdown, leverage, margin, profit splits, and consistency rules will help you make more informed decisions and avoid preventable mistakes. As you gain experience, these terms will become part of your daily trading routine and contribute to a stronger foundation for long-term success.
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