For any aspiring prop trader, mastering the language of proprietary trading is non-negotiable. Prop trading, like any specialized field, comes with its own vocabulary that can be confusing at first glance. These terms are not just jargon—they reflect key concepts, rules, and tools you’ll use daily in your trading career. If you don’t understand them, you’re already behind.
This article serves as a comprehensive glossary and explanation of the most essential prop firm vocabulary. It’s tailored for new traders who are preparing to take a funded challenge or have just started navigating the world of funded accounts. By the end, you’ll not only know the terms but also how to use them effectively to interpret rules, evaluate prop firms, and manage your risk more confidently.
Drawdown
One of the most important terms you’ll hear is “drawdown.” In prop trading, drawdown refers to how much your account balance or equity falls from a peak before recovering. Prop firms typically have two types of drawdown limits:
- Daily Drawdown: A limit on how much you can lose in one trading day.
- Max (Total) Drawdown: A limit on how much you can lose overall during the challenge or while managing a funded account.
Exceeding either of these often results in failure or account termination. Traders must understand not just the number but how it’s calculated—whether on closed trades only, intraday equity, or balance at a specific time of day.
Leverage
Leverage is the use of borrowed capital to amplify trading positions. In prop trading, it’s common to see leverage like 1:30, 1:50, or even 1:100 depending on the firm and account type.
It affects both risk and reward. Higher leverage can increase your profits, but it also magnifies your losses. Prop firms limit leverage to manage risk and often tie it to the trader’s level in their scaling plan. Understanding how leverage interacts with margin requirements is crucial.
Lot Size
Lot size is the volume of your trade, measured in standard units. For forex, 1 lot equals 100,000 units of currency. Futures traders may deal in contracts instead, but the concept is similar. Each prop firm defines acceptable lot sizes per account type, and many set maximum position limits.
Incorrect lot sizing can blow your account quickly. New traders often over-leverage because they don’t understand how lot size correlates to risk per trade, especially when working with limited drawdowns.
Risk-Reward Ratio (RRR)
The risk-reward ratio is the potential reward compared to the potential risk of a trade. For example, a 1:2 RRR means risking $100 to make $200.
While not a rule at most prop firms, your risk-reward mindset heavily impacts your ability to pass challenges. Traders with poor RRR often overtrade or revenge trade, violating firm rules. A good risk-reward structure builds discipline and increases your probability of meeting profit targets without unnecessary risk.
Stop Loss
A stop loss is an order to exit a trade at a specific price to cap your loss. It’s a critical tool for managing drawdowns and meeting prop firm expectations.
Some firms have mandatory stop loss policies. Others allow more flexibility but still monitor risk per trade. Ignoring or misplacing a stop loss is a common mistake that leads to failure in evaluations. Learning how to set stops based on volatility, structure, or average true range (ATR) is a fundamental skill.
Take Profit
The take profit is the price at which you’ll automatically exit a trade in profit. Unlike the stop loss, the take profit isn’t always required, but it’s part of structured trade planning.
Traders who consistently reach their take profit targets are more likely to hit their firm’s profit goals and progress through scaling plans. Knowing when to let trades run and when to exit based on conditions is part of evolving from amateur to professional.
Trailing Drawdown
Some prop firms use a trailing drawdown instead of a static one. A trailing drawdown follows your account equity or balance as it increases.
This means that if your account grows from $100,000 to $102,000, and the trailing drawdown is $3,000, your new minimum equity allowed becomes $99,000—no longer the original $97,000. Not understanding this mechanism is a common reason new traders fail. You need to learn how to lock in gains, scale back after wins, and trade smaller near peaks.
Consistency Rule
Some firms apply a “consistency rule,” which limits how much of your profit can be made in a single day or trade. For example, if you need to make $8,000 in profit, no more than 40% of that can come from one day.
This encourages regular trading behavior and discourages gambling. Firms want to see repeatable systems, not one-hit wonders. To stay within this rule, traders must space out gains, keep trade sizes uniform, and avoid oversized risk after losses.
Lot Size Violation
This refers to exceeding the maximum allowed lot size per position or per day, depending on the firm’s rules. Violating this can disqualify you instantly.
Make sure you read your firm’s rulebook and understand how lot sizing relates to leverage and margin. Some firms flag violations automatically via their dashboards.
News Trading Rule
Many prop firms restrict trading during high-impact economic news events such as FOMC, NFP, or CPI releases. These periods bring volatility that can blow through stops or create slippage.
Trading during restricted news windows—often 2 minutes before and after—is considered a breach of rules. This rule typically applies to both challenge and funded accounts. Use an economic calendar daily to avoid rule violations.
Scaling Plan
A scaling plan is how prop firms increase your buying power or payout as you hit specific targets over time. It’s designed to reward consistency.
Most scaling plans have conditions like minimum trading days, profit milestones, and no breaches. Understanding the fine print helps you plan trades better and avoid surprises when scaling up.
Daily Loss Limit
Distinct from daily drawdown, this limit often refers to closed losses per calendar day. Some firms calculate it from your starting balance at the beginning of the day, others from your equity. Learn how your firm defines it.
Breaching this limit—even if you’re in an open trade that later recovers—can mean disqualification. Protect yourself by placing automated limits or using firm-provided tools like dashboards or risk meters.
Trading Days Requirement
Most prop firm challenges come with a minimum number of trading days required to pass. It’s not enough to hit the profit target in two days—you often must trade for 5 or 10 days minimum.
This rule encourages consistency and removes the luck factor. Spread your activity across the required timeframe and trade smaller sizes once the target is in reach to preserve capital.
Profit Target
The profit target is the dollar amount or percentage you must achieve to complete a challenge phase. It’s usually around 8% to 10% for most firms.
Understanding how to break this goal into daily or weekly objectives helps with discipline. Rushing to meet the target in a few trades is a recipe for disaster. Traders who pace themselves tend to succeed more often.
Lot Allocation
This refers to how many lots (or contracts) you’re allowed to use based on your account size and firm rules. Going beyond this can trigger a violation.
Firms with tiered systems may allow you to increase lot allocation after a scaling event. Be sure to monitor your limits in real-time—some platforms allow alerts or blocking features to prevent over-allocation.
Round-Trip Trades
A round-trip trade is one complete cycle: entry and exit. Some firms require a minimum number of round-trip trades to qualify for payouts.
This rule prevents traders from passing challenges with one big trade. Incorporate multiple small trades into your routine to avoid delays in funding.
Swing Trading Permission
Some firms allow swing trading—holding positions overnight or over weekends—while others don’t. Violating this rule can cost you a funded account even if your trade is in profit.
If you’re a swing trader, make sure the firm explicitly allows it and know the timing rules for closing trades. Watch for blackout periods or additional margin requirements.
Dashboard
Each prop firm provides a trader dashboard where you can track metrics like equity, profit, lot size, drawdown, and rule compliance. Mastering your dashboard is essential to survival.
Check it daily before and after each trade. It’s your compass for rule adherence and performance analytics. If something looks off, contact support immediately.
Slippage
Slippage is the difference between your expected trade price and the executed price. It often occurs during volatile markets, fast news releases, or low liquidity sessions.
Some firms tolerate minor slippage, but others may flag large price discrepancies as a violation. Using limit orders and avoiding high-volatility periods can help minimize this risk.
Mentor Mode
Certain firms offer “mentor mode” or “coaching mode”—an educational account type where you receive feedback and avoid full disqualification after mistakes.
This is ideal for beginners who want to learn without the pressure of live funding. Treat it like a simulation but with accountability. Use it to build habits before graduating to full evaluation accounts.
These vocabulary terms form the foundation of your prop trading journey. Learning them early builds the literacy required to make smart decisions, follow rules, and pass evaluations. The more fluent you are in the language of prop firms, the more confident and successful you’ll be.