Prop Trading Glossary

Activation Fee

A one-time or monthly fee some firms charge to activate a funded account after you pass the evaluation, separate from the evaluation cost itself.

Backtesting

Testing a trading strategy against historical price data to estimate how it would have performed before risking real capital.

Consistency Rule

A rule limiting how much of your total profit can come from a single day or trade, designed to reward steady trading rather than one oversized win. It usually applies before your first payout.

Daily Loss Limit

The maximum you are allowed to lose in a single trading day. Breaching it usually fails the account immediately, even if your overall drawdown is still intact.

Drawdown

The maximum amount an account is allowed to lose from its peak before it is breached. The drawdown model — trailing, end-of-day or static — is one of the most important differences between prop firms and determines how much room you really have to trade.

Drawdown (Equity)

The peak-to-trough decline in account equity over a period. Distinct from a firm's rule-based maximum drawdown, it describes the actual loss experienced.

End-of-Day Drawdown

A drawdown that is recalculated only once per day, typically at the session close, rather than tick-by-tick. It gives traders room to manage positions intraday without the loss limit shrinking in real time.

Evaluation

The test phase where a trader proves they can hit a profit target within the risk rules to earn a funded account. Also called a Challenge or Combine.

Expert Advisor (EA)

An automated trading program, typically on MetaTrader, that executes a strategy without manual intervention. Many prop firms restrict or ban EAs.

Funded Account

The account a trader receives after passing an evaluation, on which they trade the firm's capital and earn a share of the profits.

Hedging

Opening offsetting positions to reduce risk, such as being long and short related instruments. Permitted by some firms and prohibited by others.

Instant Funding

A model where you skip the evaluation and pay for a funded account directly, usually in exchange for stricter rules, a lower initial profit split or a higher price.

Leverage

The use of borrowed capital to increase position size relative to your own funds. Expressed as a ratio (e.g. 1:100). Leverage magnifies both profits and losses.

Liquidity

How easily an asset can be bought or sold without moving its price. High liquidity means tight spreads and reliable fills; low liquidity increases slippage.

MAE / MFE

Maximum Adverse Excursion (the worst unrealised loss a trade reached) and Maximum Favourable Excursion (the best unrealised profit). Used to refine stops and targets.

Margin

The capital required to open and maintain a leveraged position. Falling below the required maintenance margin can trigger a margin call or liquidation.

Micro Contract

A smaller-sized futures contract (e.g. Micro E-mini) that lets traders take positions with less margin and risk — popular for managing prop-firm drawdowns precisely.

News Trading

Trading around scheduled economic releases (e.g. NFP, CPI, FOMC), which cause sharp volatility. Many prop firms restrict trading in a window around high-impact news.

Payout

A withdrawal of your share of profits from a funded account. Firms differ widely in payout frequency, speed, minimum amounts and first-payout requirements.

Pip

The smallest standard price increment in a forex pair, usually the fourth decimal place (0.0001). Used to measure gains, losses and spreads.

Profit Factor

Gross profit divided by gross loss. A profit factor above 1.0 means a strategy is net profitable; above 2.0 is generally considered strong.

Profit Split

The percentage of profits a funded trader keeps. Splits commonly range from 80% to 100%, sometimes scaling up as you hit milestones or reach larger account sizes.

Profit Target

The amount of profit you must reach during an evaluation to pass, usually expressed as a percentage of the account (commonly 6–10%) or a fixed dollar amount.

R-Multiple

A way of measuring trade outcomes in units of initial risk (R). A trade that makes twice what you risked is +2R; one that hits your stop is −1R. Useful for comparing trades of different sizes.

Reset

Paying to restart a failed or struggling evaluation without buying a brand-new account. Reset cost is an important and often-overlooked part of a firm's total price.

Risk-to-Reward Ratio

The ratio between how much you risk on a trade and how much you aim to gain. A 1:2 ratio means risking one unit to make two; combined with win rate it determines profitability.

Scaling Plan

A program that increases your funded capital as you stay profitable and consistent, letting successful traders manage progressively larger accounts over time.

Scalping

A short-term style of taking many small profits from tiny price moves, often holding positions for seconds or minutes. Some firms restrict scalping near news.

Sim-Funded

A funded account that runs on a simulated (demo) environment, with the firm paying real profits from its own capital. The industry norm for most retail prop firms.

Slippage

The difference between the expected price of a trade and the price at which it actually executes, common during fast markets or low liquidity.

Spread

The difference between the bid (sell) and ask (buy) price. It is an implicit transaction cost — the tighter the spread, the cheaper it is to enter and exit.

Static Drawdown

A fixed maximum loss level that never moves regardless of how much profit you make. Considered the most forgiving and predictable drawdown model.

Stop-Loss

A pre-set order that closes a position once price reaches a defined level, capping the loss on a trade. Essential for staying inside prop-firm risk limits.

Swing Trading

Holding positions for several days to weeks to capture larger moves. Requires firms that permit overnight and weekend holding.

Take-Profit

A pre-set order that closes a position once it reaches a target price, locking in a gain without needing to watch the market.

Tick

The smallest price movement an instrument can make. In futures, each tick has a fixed dollar value, so tick size directly affects profit and loss per contract.

Trailing Drawdown

A drawdown that follows your highest balance or equity upward, reducing your loss buffer as you make profit. It can be calculated intraday (tightest and most punishing) or at end of day. Once it ratchets up, it usually does not come back down.

Trailing Threshold

The moving line created by a trailing drawdown that your balance must stay above. It typically locks once it reaches your starting balance plus a set buffer.

Volatility

The degree of price variation over time. Higher volatility means larger, faster moves — more opportunity but also more risk.

Win Rate

The percentage of trades that are profitable. A high win rate is not enough on its own — it must be weighed against your average win versus average loss.