Forex Prop Firm Glossary: Key Terms Every Beginner Must Know

Entering the world of forex proprietary trading is exciting, but it also introduces a specialized vocabulary that can feel overwhelming to newcomers. Whether you're preparing for a prop firm challenge, managing funded capital, or just starting to explore the prop trading landscape, having a solid grasp of key terminology is essential.

This glossary will walk you through the foundational terms every beginner should understand before trading with a prop firm. It’s not just about passing an evaluation—it's about thinking like a professional from day one.

1. Proprietary Trading (Prop Trading)

Definition: Trading financial instruments using the firm’s capital rather than personal funds.
Why It Matters: Prop firms allow traders to access significant capital without risking their own money, but they expect consistent performance and risk management.

2. Funded Account

Definition: A live trading account funded by a prop firm after the trader passes an evaluation or challenge.
Why It Matters: Once funded, the trader shares profits with the firm and must follow strict rules (e.g., daily loss limits, maximum drawdown).

3. Evaluation Phase / Challenge

Definition: A trial period during which traders must meet profit targets and adhere to risk rules to qualify for a funded account.
Common Elements:

• Profit target (e.g., 10%)
• Daily drawdown limit (e.g., 5%)
• Max drawdown (e.g., 10%)
• Trading period (e.g., 30 days)

4. Daily Drawdown

Definition: The maximum allowable loss in a single day.
Why It Matters: Exceeding this limit usually results in account disqualification. Smart traders size their positions with this rule in mind.

5. Max Drawdown

Definition: The maximum amount of equity loss a trader can sustain from peak to trough during the evaluation or funded phase.
Types:

• Static: Fixed level below initial balance.
• Trailing: Follows your equity as it grows.

6. Leverage

Definition: The use of borrowed capital to amplify trading positions.
Example: 1:100 leverage means you can control $100,000 with only $1,000.
Caution: High leverage increases both profit potential and risk.

7. Profit Split

Definition: The percentage of profits shared between the trader and the prop firm.
Typical Ratios: 70/30, 80/20, 90/10 in favor of the trader.
Why It Matters: Higher profit splits reward strong performance but may come with stricter rules.

8. Consistency Rule

Definition: A rule requiring traders to maintain consistent performance rather than achieving all profits in one or two trades.
Examples:

• No trade should represent more than a certain % of total profit.
• Weekly profit distribution must be balanced.

9. Lot Size / Position Size

Definition: The volume of a trade measured in standard, mini, or micro lots.
Relevance in Prop Firms: Many firms restrict max lot size or base it on account size to control risk exposure.

10. Risk-to-Reward Ratio (R:R)

Definition: A measure comparing the potential profit of a trade to its potential loss.
Ideal Practice: Aim for trades with R:R of at least 1:2 to ensure sustainable profitability under evaluation constraints.

11. Equity

Definition: The real-time value of your trading account, including unrealized profits/losses.
Why It Matters: Drawdown and trailing limits are often based on equity, not balance.

12. Trading Hours & News Restrictions

Definition: Some prop firms restrict trading during high-impact news events or outside standard trading hours.
Examples:

• No trading 2 minutes before/after NFP or CPI
• Restrictions on overnight/weekend holding

13. Trade Copier

Definition: A tool to copy trades from one account to another.
Use Case: Traders often use it to manage multiple challenges or mirror their live trades across accounts. Some firms prohibit it.

14. MetaTrader (MT4/MT5)

Definition: Popular trading platforms supported by most prop firms.
Features: Charting tools, order execution, expert advisors (EAs)
Why It Matters: Knowing your way around MT4/MT5 is a must for fast and precise execution.

15. Expert Advisor (EA)

Definition: An automated trading program (bot) that executes trades based on pre-defined criteria.
Note: Some prop firms allow EAs; others restrict or ban them due to risk control concerns.

16. Scaling Plan

Definition: A structured method for increasing account size or profit split based on performance milestones.
Why It Matters: Successful traders can grow their capital access over time, often doubling the account every few months.

17. KYC (Know Your Customer)

Definition: A verification process requiring traders to submit identity and address documents.
When It Happens: Typically before receiving withdrawals or during onboarding to a funded account.

18. Swing Trading vs. Scalping

Swing Trading: Holding trades for hours or days to capture larger moves.
Scalping: Entering and exiting trades within minutes for small gains.
Firm Rules: Some firms restrict scalping or require a minimum hold time (e.g., 1 minute).

19. Soft Breach vs. Hard Breach

Soft Breach: A warning or temporary restriction that doesn’t end the evaluation.
Hard Breach: A rule violation (like exceeding drawdown) that results in account termination.
Tip: Know your firm's breach policy inside out.

20. Dashboard / Trader Portal

Definition: The interface where traders monitor performance metrics, equity curve, rule violations, and progress through the challenge.
Tip: Check it daily. The portal reflects the firm’s internal judgment of your account.

Language of the Profession

Understanding the vocabulary of prop trading is more than academic—it’s part of the discipline. Prop firms reward consistency, risk control, and professionalism. By mastering the terms above, you're not only decoding the rules—you’re developing the mindset of a trader who survives and thrives in this competitive space.

The language you speak shapes how you trade. So speak it like a pro.