Prop Trading Glossary: Essential Terms You Need to Know
Introduction to the Prop Trading Glossary
If you’re stepping into the world of proprietary trading, one of the first things you need is clarity around the terminology. From evaluation phases to payout structures, the language used in the industry can feel like a foreign dialect. This comprehensive prop trading glossary is designed to help beginners and intermediate traders alike understand key concepts, terms, and acronyms that form the foundation of a successful trading journey.
Understanding the right terms can significantly boost your confidence and performance, especially if you plan to join firms like Larsa Capital, where knowing the rules is as important as having a profitable strategy.
Common Account and Evaluation Terms
Funded Account
A live trading account given to traders who pass evaluation criteria set by the firm. Traders use the firm’s capital and share profits.
Challenge or Evaluation Phase
An assessment period where traders must meet specific profit targets and adhere to rules before earning a funded account.
Scaling Plan
A model that increases the capital available to a trader based on consistent performance over time.
Drawdown
The reduction from a high point in the account balance. Can be daily or overall, and exceeding it often leads to disqualification.
Max Daily Loss
The maximum allowed loss in a single trading day. Breaching this can result in challenge failure or account termination.
Risk and Money Management Terms
Risk-to-Reward Ratio (RRR)
The comparison between potential risk and expected reward. A common ratio is 1:2, meaning you aim to earn twice what you risk.
Position Sizing
The process of determining how much capital to allocate per trade to manage risk effectively.
Stop Loss
A predefined point where a trade is automatically closed to prevent further loss.
Leverage
The ability to control a large position with a relatively small amount of capital. High leverage increases both risk and reward.
Margin Call
A warning or automatic liquidation that occurs when your account falls below the required margin threshold.
Performance Metrics and Technical Indicators
Win Rate
The percentage of trades that end in profit. It’s a key performance indicator alongside risk-to-reward ratio.
Profit Factor
A measure of gross profit divided by gross loss. A value greater than 1 indicates a profitable system.
Equity Curve
A graph showing the progression of your account balance over time. Smooth upward curves indicate consistent success.
Drawdown Duration
The time it takes to recover from a loss or series of losses. Shorter durations are generally preferred.
Trading Styles and Strategies
Scalping
A strategy focused on taking small profits from minor price movements, often involving many trades per day.
Day Trading
Buying and selling assets within the same trading day to capitalize on intraday price movements.
Swing Trading
Holding positions for several days or weeks to capture medium-term market trends.
Algorithmic Trading
Using automated software or bots to execute trades based on pre-programmed criteria.
Platform and Execution Terms
MetaTrader 4 (MT4) / MetaTrader 5 (MT5)
Popular trading platforms used for executing trades, running expert advisors, and conducting analysis.
Slippage
The difference between the expected price of a trade and the actual executed price, often due to market volatility.
Spread
The difference between the bid and ask price. Lower spreads are generally better for traders.
Execution Speed
How fast a platform can process and execute your trade. Faster speeds reduce slippage and missed opportunities.
Payout and Profit Split Terms
Profit Split
The percentage of profit that a trader keeps after making successful trades on a funded account.
Payout Schedule
Defines when traders receive their profit share—usually bi-weekly or monthly.
Withdrawal Threshold
The minimum balance or profit required before a trader can request a payout.
Psychological and Behavioral Terms
Trading Psychology
The mental and emotional aspects that influence a trader’s decisions. Discipline and emotional control are vital.
Revenge Trading
The act of making impulsive trades to recover from a loss. It often leads to even greater losses.
Overtrading
Placing too many trades in a short time, usually driven by emotion rather than strategy.
FOMO (Fear of Missing Out)
A common trader emotion that can lead to poor decision-making and entering trades late.
Conclusion: Mastering the Prop Trading Glossary
The better you understand the terminology of proprietary trading, the more confident and capable you’ll become. This prop trading glossary gives you a foundation to build upon—whether you’re preparing for a challenge or managing a funded account.
Larsa Capital empowers traders by ensuring clarity and transparency throughout the trading process. Now that you’re equipped with this essential vocabulary, you’re ready to engage with confidence and precision in the prop trading world.
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