Getting started with a proprietary trading firm (prop firm) can be an exciting opportunity for traders to access significant capital and trade professionally. However, before jumping into a funded account, it's crucial to understand the key terms and rules that govern prop trading. This guide covers the essential terms every trader should know before joining a prop firm.

1. Prop Firm & Funded Account Terms

• Prop Firm – A company that funds traders with capital in exchange for a share of the profits.
• Funded Account – The live trading account provided to a trader after passing an evaluation.
• Profit Split – The percentage of trading profits a trader keeps (e.g., 80/20 or 90/10).
• Scaling Plan – A program where prop firms increase a trader’s capital as they demonstrate consistent profitability.

2. Challenge & Evaluation Terms

• Challenge / Evaluation Phase – The process traders must pass to qualify for a funded account.
• Phase 1 & Phase 2 – Most firms require traders to complete two phases before funding.
• Pass Criteria – The profit target and risk limits traders must meet (e.g., 10% profit without exceeding a 5% daily loss).
• Consistency Rule – A rule ensuring traders do not make all their profits in a single day, promoting steady performance.

3. Risk Management Terms

• Max Daily Loss – The maximum amount a trader can lose in one day (e.g., 5%).
• Max Drawdown – The total amount a trader can lose before violating the funding rules (e.g., 10%).
• Trailing Drawdown – A dynamic drawdown that moves with a trader’s highest profit point.
• Lot Size & Position Sizing – The amount of capital allocated per trade to manage risk.
• Stop Loss – A pre-set exit point to limit losses on a trade.

4. Execution & Trading Platform Terms

• Leverage (e.g., 1:100) – The ability to control a larger trading position with less capital.
• Spreads – The difference between the bid and ask price, affecting trade costs.
• Commissions – Fees charged per trade, often in ECN accounts.
• Slippage – The difference between the expected price and the actual execution price.
• MT4 / MT5 / cTrader / TradingView – The most commonly used trading platforms in prop trading.

5. Payout & Withdrawal Terms

• Payout Cycle – How often a trader gets paid (weekly, bi-weekly, or monthly).
• Minimum Payout Threshold – The minimum amount a trader must earn before requesting a withdrawal.
• Refund Policy – Some prop firms refund the challenge fee if a trader gets funded.

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Understanding these terms is essential for any trader looking to succeed in a prop firm. A strong grasp of funding rules, risk management, and execution mechanics can help traders navigate the challenges of prop trading more effectively. By learning these key concepts, traders can make informed decisions, manage risk efficiently, and maximize their profit potential.

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