Glossary
Prop firm trading terms, minus the jargon.
The terms you'll run into during your evaluation, explained simply. Not sure what a word means? It's probably here.
- Backtest
- Testing a strategy on past market data to estimate how it would have performed before you put real money at risk.
- Break-even (BE)
- A trade closed flat: no gain, no loss. Also used in "moving to break-even", meaning shifting your stop loss to your entry price to take the risk off the trade.
- Consistency rule
- A rule some prop firms enforce: no single day can account for more than a set percentage of total profit. It stops traders from passing a challenge on one big lucky day.
- Daily drawdown (max daily loss)
- The maximum loss allowed in a single day, often 5% of the account. Go over it by even a cent and the challenge ends immediately.
- Drawdown
- The drop in your account from a peak. At prop firms, two types apply at once: the daily drawdown (reset every day) and the overall max drawdown.
- Equity
- Your account's value right now, including open positions. Most drawdown rules are calculated on equity, not just on closed trades.
- Evaluation (challenge)
- The paid test a prop firm uses to check that a trader manages risk well before handing over its capital. Often split into two phases.
- Funded account
- The live account you get after passing the evaluation. You trade the firm's capital and keep a share of the profits.
- Lot
- The standard unit of position size. In forex, 1 lot = 100,000 units of the base currency. You can also trade mini lots (0.1) and micro lots (0.01).
- Max drawdown (maximum loss)
- The absolute loss limit since the start of the challenge, across all days combined, often 10% of the starting balance.
- Money management
- The set of rules that decide how much to risk per trade and how to protect your capital. Often seen as more decisive than the entry strategy itself.
- Payout
- The payment of profits to a funded trader. Each firm sets its own terms: frequency, minimum amount and profit split (often 70 to 90%).
- Pip
- The smallest standard price move in a currency pair (the 4th decimal for most pairs, the 2nd for yen pairs). For gold and indices, people usually talk in "points" instead.
- PnL (Profit & Loss)
- The net result, profit or loss, of a trade or a group of trades. "Net PnL" includes fees.
- Position sizing
- Working out your position size so that a loss at your stop equals exactly the amount you decided to risk. The core calculation of disciplined trading.
- Profit factor
- Total gains divided by total losses. Above 1, the strategy is profitable; at 2, it makes twice as much as it loses.
- Profit target
- The profit you need to hit to pass a challenge phase, often 8 to 10% of the account.
- Prop firm
- A proprietary trading firm that gives its capital to traders selected through an evaluation, in exchange for a share of the profits.
- R-multiple (R)
- A trade's result expressed as a multiple of the initial risk. A trade that makes twice what you risked is +2R; a stop-out is −1R. It lets you compare trades of different sizes.
- Revenge trading
- Jumping back into a trade on impulse after a loss, often bigger, to "win it back". One of the main reasons traders fail evaluations.
- Risk per trade
- The percentage of your account you're willing to lose on a given position. During an evaluation, 0.25% to 1% is generally considered conservative.
- Scaling
- A gradual increase in funded account size that some firms grant when a trader shows consistent results.
- Setup
- The set of conditions that define a trade opportunity under your strategy (technical pattern, context, trigger).
- Slippage
- The gap between the price you expected on an order and the price it actually filled at, common during high volatility or thin liquidity.
- Spread
- The difference between an instrument's bid and ask price. It's a hidden cost you pay every time you enter a trade.
- Stop loss
- The order that automatically closes a position at a loss level set in advance. The most basic risk management tool.
- Trailing drawdown
- A loss limit that "trails" your equity highs: it moves up when you win and never comes back down. A key mechanic at Topstep, and a tricky one, because making money and then giving it back can breach the rule.
- Win rate
- The percentage of winning trades. Misleading on its own: a 40% win rate with a good risk/reward ratio can be far more profitable than a poorly managed 70% win rate.