Terms in Prop Trading: Essential Concepts Every Trader Should Know

Proprietary trading (prop trading) involves unique processes, terminologies, and concepts that set it apart from traditional retail trading. For anyone aspiring to excel in this field, understanding key prop trading terms is essential. In this glossary, we’ll explore the most important terms, their meanings, and their significance in prop trading.

Key terms in prop trading

Definition: The act of trading financial instruments using a firm’s capital rather than a client’s.
Significance: Prop trading allows firms to retain 100% of the profits while taking on the full risk of any losses.

Definition: A trading account provided by a proprietary trading firm with pre-allocated capital for traders to use.
Significance: Funded accounts are granted to traders who successfully complete evaluation processes, enabling them to trade without risking personal funds.

Definition: A process designed to assess a trader’s skill, consistency, and risk management before granting access to funded accounts.

Examples:

  • One-Step Evaluation: Requires meeting a single profit target within defined risk parameters.
  • Two-Step Evaluation: A more comprehensive assessment split into two phases with separate profit targets and risk limits.

Definition: The maximum amount a trader is allowed to lose in a single trading day.
Significance: Enforced by prop firms to protect their capital and in still discipline among traders.

Definition: The maximum cumulative loss a trader can incur before being disqualified from a funded account.
Example: A max loss limit of 10% on a $100,000 account means losses must not exceed $10,000.

Definition: The use of borrowed capital to amplify trading positions.
Significance: High leverage is common in prop trading, allowing traders to control larger positions with smaller amounts of capital.

Definition: The ratio comparing potential profit to potential loss in a trade.
Example: A risk-to-reward ratio of 1:3 means risking $100 to gain $300.

Definition: The pre-defined profit level a trader must achieve during the evaluation phase to qualify for a funded account.
Example: A common profit target in prop trading is 8% to 10%.

Definition: A rule requiring traders to maintain steady performance rather than achieving profits through sporadic large trades.
Significance: Ensures traders follow sustainable and repeatable trading strategies.

Definition: A graphical representation of a trader’s account balance over time.
Significance: Used to analyze trading performance and consistency.

Definition: The percentage of profits a trader is entitled to retain, with the remaining portion going to the proprietary trading firm.
Example: A trader on an 80% profit split retains $8,000 of a $10,000 profit.

Definition: A fee charged by some firms to process payouts or maintain funded accounts.

Definition: A structured program that increases a trader’s account size based on consistent performance.
Example: A scaling plan might grant a 25% account increase every 3 months if specific profit targets are met.

Definition: The use of automated systems or algorithms to execute trades based on pre-defined criteria.

Definition: A feature available on trading platforms like MT5, showing the real-time supply and demand for an asset.

Definition: Software features used for technical analysis, including indicators like RSI, moving averages, and Fibonacci retracements.

Definition: Automated trading bots available on platforms like MT4 and MT5 to help traders execute strategies without manual intervention.

Definition: Trading in currency pairs like EUR/USD, GBP/JPY, and USD/JPY.
Significance: Forex is the most commonly traded asset class in proprietary trading due to its high liquidity.

Definition: Trading in stock market indices such as NASDAQ, S&P 500, and DAX.

Definition: Trading physical goods like gold, silver, and crude oil.

Definition: Digital currencies like Bitcoin, Ethereum, and Litecoin, known for their high volatility.

Definition: Taking offsetting positions to reduce risk in a volatile market.

Definition: A strategy focusing on holding positions for several days to capture larger price movements.

Definition: A trading style that involves making small, quick profits from short-term price movements.

Definition: A widely used trading platform offering advanced charting, algorithmic trading, and risk management tools.

Definition: The successor to MT4, supporting additional asset classes and enhanced trading features like Depth of Market (DOM).

Definition: A trading platform designed for ease of use, often offered by proprietary trading firms.

Definition: A professional trading platform known for its advanced analytics and intuitive interface.

Definition: A statement required by prop firms outlining the risks involved in trading.

Definition: Adherence to financial regulations governing proprietary trading activities.

1. What is a profit split in prop trading?

A profit split refers to the percentage of profits a trader retains, with the rest allocated to the proprietary trading firm.

2. What does a daily loss limit mean?

A daily loss limit is the maximum amount a trader can lose in one day, ensuring capital preservation and discipline.

3. What is a scaling plan in proprietary trading?

A scaling plan allows traders to grow their account size by meeting specific performance criteria, like achieving a 10% profit target over three months.

4. What assets can I trade in prop trading?

Prop firms typically offer Forex, indices, commodities, and cryptocurrencies as tradable assets.

5. What tools do proprietary traders use?

Popular tools include trading platforms like MT4, MT5, cTrader, and advanced charting software such as TradingView.

Understanding prop trading terminology is crucial for anyone entering the field, whether you’re a beginner or a seasoned trader. From profit splits and scaling plans to risk management rules and evaluation processes, these terms form the foundation of your success in proprietary trading.

Ready to master proprietary trading? Explore our in-depth guides on evaluation processes, profit splits, and scaling plans to kickstart your journey today!”

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Best Brokers

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How we scored

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How we scored

Programs Offered (5/5), Profit Split & Pricing (4.5/5), User Experience (5/5), Support & Education (4.5/5)

Sabio Trade offers a streamlined 1-step evaluation process with account sizes ranging from $20,000 to $650,000 and profit splits of 80%. Traders benefit from a low-risk environment with 10% profit targets and 5% daily drawdown limits. Powered by the Quadcode platform, Sabio Trade provides access to over 250 assets, on-demand payouts, and top-tier educational resources. Trustpilot Rating: 4.1/5.

How we scored

Programs Offered (4.7/5), Profit Split & Pricing (4.5/5), User Experience (4.6/5), Support & Education (5/5)

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How we scored

Programs Offered (4.8/5), Profit Split & Pricing (4.6/5), User Experience (4.7/5), Support & Education (4.5/5)