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: A Complete Glossary
1. Proprietary Trading (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.
2. Funded Account
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.
3. Evaluation Process
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.
Risk Management Terminology
4. Daily Drawdown (Daily Loss Limit)
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.
5. Maximum Drawdown (Max Loss Limit)
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.
6. Leverage
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.
7. Risk-to-Reward Ratio
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.
Trading Metrics and Performance
8. Profit Target
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%.
9. Consistency Rule
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.
10. Equity Curve
Definition: A graphical representation of a trader’s account balance over time.
Significance: Used to analyze trading performance and consistency.
Payout and Profit-Sharing Terms
11. Profit Split
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.
12. Performance Fee
Definition: A fee charged by some firms to process payouts or maintain funded accounts.
Scaling and Growth Terms
13. Scaling Plan
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.
Trading Strategies and Tools
14. Algorithmic Trading (Algo Trading)
Definition: The use of automated systems or algorithms to execute trades based on pre-defined criteria.
15. Depth of Market (DOM)
Definition: A feature available on trading platforms like MT5, showing the real-time supply and demand for an asset.
16. Charting Tools
Definition: Software features used for technical analysis, including indicators like RSI, moving averages, and Fibonacci retracements.
17. Expert Advisors (EAs)
Definition: Automated trading bots available on platforms like MT4 and MT5 to help traders execute strategies without manual intervention.
Asset Classes in Prop Trading
18. Forex
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.
19. Indices
Definition: Trading in stock market indices such as NASDAQ, S&P 500, and DAX.
20. Commodities
Definition: Trading physical goods like gold, silver, and crude oil.
21. Cryptocurrencies
Definition: Digital currencies like Bitcoin, Ethereum, and Litecoin, known for their high volatility.
Proprietary Trading Rules and Guidelines
22. Hedging
Definition: Taking offsetting positions to reduce risk in a volatile market.
23. Swing Trading
Definition: A strategy focusing on holding positions for several days to capture larger price movements.
24. Scalping
Definition: A trading style that involves making small, quick profits from short-term price movements.
Trading Platforms and Infrastructure
25. MetaTrader 4 (MT4)
Definition: A widely used trading platform offering advanced charting, algorithmic trading, and risk management tools.
26. MetaTrader 5 (MT5)
Definition: The successor to MT4, supporting additional asset classes and enhanced trading features like Depth of Market (DOM).
27. Match-Trader
Definition: A trading platform designed for ease of use, often offered by proprietary trading firms.
28. cTrader
Definition: A professional trading platform known for its advanced analytics and intuitive interface.
Important Legal and Compliance Terms
29. Risk Disclaimer
Definition: A statement required by prop firms outlining the risks involved in trading.
30. Regulatory Compliance
Definition: Adherence to financial regulations governing proprietary trading activities.
FAQs
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.
Conclusion
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!”
Instant Funding offers flexible proprietary trading with account sizes from $1,250 to $200,000 and profit splits up to 90%. Choose from Instant Funding, One-Phase, or Two-Phase models with a scaling plan up to $1.28M. Enjoy weekly payouts, diverse tradable assets, and fast execution on DX Trade, cTrader, and Match-Trader. Rated 4.6/5 on Trustpilot, Instant Funding is a trusted choice for traders seeking fast funding and high earnings potential.
FTMO offers funding challenges priced between €155 and €1,080, with account sizes ranging from $10,000 to $200,000. The evaluation process includes 2 steps, requiring a 10% profit target in Phase 1 and 5% in Phase 2, while adhering to a 5% daily loss limit and a 10% maximum drawdown. Funded traders receive an 80% profit split, with account scaling increasing by 25% every 4 months for consistent performance. FTMO is highly rated, with a 4.8/5 Trustpilot rating.
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.
Hantec Trader offers flexible funding options ranging from $2,000 to $200,000 with competitive profit splits of up to 90%. With its straightforward 1 or 2-step evaluation models, achievable profit targets, and trust pilot rating of 4.6/5, Hantec Trader stands out as a reliable proprietary trading firm. Traders can enjoy incremental growth opportunities, transparent risk management, and a smooth payout process every 14 to 30 days.
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