Prop firm glossary
The vocabulary of this industry is deliberately dense, and a term you misread in the terms and conditions is a term that can cost you an account. Each entry below defines one word in plain language and explains what it changes in practice.
A
- A-book / B-book A-book describes the model where client positions are passed through to the real market; B-book the model where the firm is itself the counterparty and keeps the losses. Most prop firms run predominantly on a B-book.
- Activation fee An activation fee is charged when you move onto a funded account, after passing the challenge. Absent at some firms, it comes on top of the evaluation price and is not refundable.
B
C
- Challenge A challenge is the paid evaluation a prop firm sells. The trader must reach a profit target without crossing the imposed loss limits, on a simulated account. Passing it gives access to a funded account.
- Commission A commission is a fee charged per lot or per contract traded, on top of the spread. It is explicit at firms quoting raw spreads, and folded into the price difference at those advertising zero commission.
- Consistency rule A consistency rule caps the share a single day can represent in total profit. Set between 15 and 50 % depending on the firm, it most often blocks a withdrawal rather than failing a challenge.
- Copy trading Copy trading means replicating another account's positions. Prop firms prohibit or restrict it almost systematically, including between several accounts held by the same trader.
D
- Daily loss limit A daily loss limit is the maximum loss allowed on a single trading day. Separate from total drawdown, it resets each day and breaching it means, depending on the firm, the day is suspended or the account is closed.
- Drawdown Drawdown is the maximum loss allowed on a prop firm account before it is closed. It is expressed as a percentage or a fixed amount, and calculated under three models — static, end-of-day trailing or intraday trailing — with very different consequences.
E
- Equity Equity is the value of a trading account with open positions included, unlike balance which counts only closed trades. Most prop firms calculate their risk limits on equity.
- Evaluation An evaluation is the phase during which a trader demonstrates the ability to reach a profit target while respecting risk limits. It precedes access to a funded account and takes place on a simulated account.
- Expert Advisor An Expert Advisor is a program that places orders automatically according to predefined rules. Prop firms generally allow them, except for strategies exploiting a technical flaw such as latency arbitrage.
F
H
I
K
L
- Leverage Leverage determines the exposure a trader can take relative to the account's nominal capital. At prop firms it ranges from 1:10 to 1:100 depending on instrument and programme, and bears only an indirect relation to real risk.
- Lot A lot is the unit of position size on forex: one standard lot represents 100,000 units of the base currency. Prop firms often cap the cumulative volume allowed per day or per instrument.
M
- Maximum allocation Maximum allocation is the total capital a prop firm will entrust to a single trader. It is reached through the scaling plan and most often sits between $150,000 and $2 million depending on the firm.
- Minimum trading days A minimum trading day requirement forces you to record a set number of active sessions before passing a phase. Generally 1 to 5 days, it rules out passes obtained on a single position.
N
O
P
- Payout A payout is the actual transfer of a funded trader's gains. It follows a cycle specific to each firm, after a minimum period since the account was opened, and often above a floor amount.
- Profit buffer A profit buffer is the minimum gain you must build on a funded account before you can request a withdrawal. It acts as a cushion for the firm and delays the first payout.
- Profit split The profit split is the share of gains paid back to the trader on a funded account. It generally sits between 80 and 90 %, and can reach 100 % at some firms through a scaling plan or a promotional offer.
- Profit target A profit target is the gain a trader must achieve to pass an evaluation phase. Expressed as a percentage of nominal capital, generally 6 to 10 % in the first phase, it is often halved in the second.
- Prop firm A prop firm is a company that gives access to a funded trading account after a paid evaluation. The trader deposits no capital: they pay evaluation fees, respect risk rules, and keep a share of the profits generated.
R
- Refundable fee A refundable fee is returned to the trader at their first payout, bringing the net cost of a successful evaluation to zero. The refund almost never covers resets or activation fees.
- Reset A reset restarts a failed challenge, charged at a rate generally below the initial purchase price. It relaunches the evaluation without buying a full account again, but is rarely refundable.
S
- Scaling plan A scaling plan is the mechanism by which a prop firm increases the capital allocated to a consistent trader. Progression triggers after a number of profitable cycles or successful withdrawals, and sometimes comes with a higher profit split.
- Scalping Scalping means taking many very short positions to capture small price differences. Allowed by most prop firms, in practice it runs into minimum holding times and execution conditions.
- Simulated account A simulated account reproduces market conditions without orders reaching a real market. Most prop firm accounts, including those held after passing the challenge, run on this model.
- Slippage Slippage is the gap between the price requested and the price actually obtained on execution. On a prop firm account it depends on the company's infrastructure, and can trigger a drawdown breach.
- Spread The spread is the gap between an instrument's buy and sell price. On a prop firm account it comes from the firm's own configuration, and it is a recurring cost traders routinely underestimate.
- Static drawdown A static drawdown is a loss limit calculated once against the account's starting balance, and never moved. Unlike trailing drawdown, it does not follow gains upward.
- Stop out A stop out is the platform closing positions automatically once a loss threshold is reached. On a prop firm account it usually coincides with maximum drawdown and ends the account.
- Swing trading Swing trading holds positions for several days or weeks. On a prop firm account it requires overnight and weekend holding to be allowed, and it sits badly with an intraday trailing drawdown.
T
- Time limit A time limit is the deadline for passing an evaluation phase. Long fixed at 30 or 60 days, it has largely disappeared among recent firms, replaced by minimum activity requirements.
- Trailing drawdown A trailing drawdown is a loss limit that follows the account's gains upward: every new high raises the floor the account must not fall below. It exists in an end-of-day form and a far stricter intraday form.