Trading Terminologies Every New Trader Should Know

To gain a solid understanding of prop trading, you must learn its core principles and foundational concepts.

Let’s examine some key terms every new trader should know.

Trading environment

Simulated trading: This means using virtual funds to speculate in an environment that mimics real market conditions. It is important to note that most “funded accounts” are simulated live accounts.

Demo account: Free trial or demo trading is a type of simulated trading that allows new participants to practice, get familiar with a trading platform and a firm’s services. It has no financial risk or reward.

Your capital and account’s health

Account balance: This is the total amount you have when all your positions are closed.

Account equity: It refers to the real time value of your account. It includes your account balance plus or minus any unrealised profit(s) or loss(es) from open trades.

Unrealised P&L: Profit or loss from trades that are still open.

Equity curve: EC is a graphical representation of the change in your account value over a period of time.

Risk management rules

Drawdown: The percentage or amount of loss from the highest value of your account before recovery.

Max drawdown: The maximum total loss allowed on the account.

Daily drawdown: This one refers to the minimum percentage of your daily or starting equity you’re not expected to fall below in a 24 hours window.

Equity drawdown: A drawdown calculation that is based on unrealised (floating) profits and losses. If your open trades go too deep into the red, you can violate this limit even if you haven’t closed the trades yet.

Trailing drawdown: A “moving” loss limit that follows your account’s highest equity point.

Violation: Simply means breaking a firm’s rule that often results in account termination.

Drawdown recovery time: The period required to return to your previous equity peak.

Risk exposure

Risk per trade: The percentage of capital you stand to lose if your stop loss is hit.

Risk/Reward ratio: R:R is the relationship between your potential loss and gain.

Position sizing: This is an act of calculating the number of units/lots to trade based on your risk tolerance and SL distance.

Margin: The “collateral” required by a proprietary firm to keep a trade open.

Margin call: A notification that tells you that your account has low funds to cover open losses.

Value at Risk: A stat that can be used to measure the risk of loss on a portfolio.

Order types and market interaction

Market order: An instruction to buy or sell immediately at current price.

Limit order: A trader can also instruct a trading platform to buy/sell at a particular price later.

Stop order: Becomes a market order once a set price level is reached.

Stop loss: SL is an order placed to exit a position at a particular price level to prevent further losses.

Take profit: Here is an order placed to exit a position once a set profit target is met.

Partial fills: When only part of your large order is executed as a result of low liquidity at your price.

Illiquidity: A situation where there are few buyers or sellers, which makes it difficult to execute trades without causing massive price swings.

Asset pricing and trading fees

Bid price: The price market participants are willing to buy from you.

Ask price: This is the minimum price at which traders are willing to sell their asset to you.

Spread: The difference between the Bid and Ask.

Commission: A flat fee charged by the broker/firm per trade or lot.

Slippage: The difference between the price you expected and the price the trade executed.

Swap free: This means no interest will be paid by you or earned for holding a position past the daily rollover time.

Trading times and market rhythm

Forex trading sessions: The four major periods: London, New York, Tokyo, Sydney.

Major economic events: These news reports that can influence market behaviour.

Regular trading hours: The primary hours when an exchange (like the NYSE) is open.

Rollover times: The moment when one trading day ends and the next begins.

Weekend holding policies: Rules stating whether can hold or must close trades before the Friday market ends.

News trading rule: Restrictions on opening or closing trades during high-impact economic news events.

Asset class, their personality and risk profile

Forex: This is exchanging one currency for another. It is the largest financial market in the world.

Stocks: An agreement to exchange the difference in the value of a company’s share between the time a contract is opened and when it is closed. Here, traders focus more on company research (announcements) than technical analysis.

Indices: A basket of stocks representing a sector or economy. It tracks the performance of a group of stocks within an exchange or sector.

Commodities: This is price speculation for raw materials like Gold, Oil, or Wheat. It is controlled by supply and demand.

Cryptocurrencies: These are non-traditional digital or virtual currencies that are run by blockchain technology. It is highly volatile.

Futures: Contracts to buy/sell an asset at a future date at a set price.

Contract for Difference: A derivative that allows you to speculate on price movement without owning the asset.

Note, many proprietary firms give access to these markets via CFDs especially if they are connected to a broker or liquidity provider.

Platform and execution infrastructure

Liquidity: How easy an asset can be bought or sold without affecting its price.

Thin market: A slang used to refer to an illiquid market where the “order book” is almost empty.

Execution quality: The speed and accuracy of your order fills.

Electronic Communication Network: ECN is a system that connects individual traders directly with liquidity providers.

Trading platforms: Software used to analyse and execute trades. For example, RF-Trader, MT4, MT5, etc.

Trading styles, and automation

Algorithmic trading: Using computer programs to execute trades based on defined rules.

Expert advisors: EAs are automated scripts to carry out trades, examine and scale. It is primarily used within the MetaTrader ecosystem.

Hedging: Opening a position to offset possible losses in another position.

Scalping: A style that involves many short trades for very small profits throughout the day.

Copy trading: When you automatically duplicate the trades of another trader.

Day trading: This group of traders enter and close all trades within the same trading day. Positions are not held overnight.

Swing trading: A short-to-medium-term approach where you hold positions for several days to capture larger price moves.

Performance measurement

How you (or a firm) evaluates your long-term viability.

Win rate: The percentage of total trades that result in a profit.

Profit factor: This is calculated by dividing total gross profit by total gross loss. When the result (value) is above 1, it signals you are profitable. It means you are making more than you are losing. Below 1 = unprofitability. It helps measure the efficiency of a trading system.

Average win/loss: The mean dollar amount gained or lost per trade.

Consistency rule: A regulation stating that no single trading day’s profit should exceed a certain percentage of your total profit.

Monthly return distribution: A breakdown of performance on a month by month basis.

Risk-adjusted metrics

Firms care more about how you made the money than how much you made.

Sharpe ratio: Measures the performance of an investment compared to a risk-free asset, adjusted for risk.

Calmar ratio: The ratio of average annual return to the maximum drawdown.

Risk-adjusted returns: A calculation of profit that accounts for the amount of risk taken to achieve it.

Volatility: This is the degree of variation in trading prices of an instrument in a period of time.

Implied volatility: The market’s forecast of a likely movement in an asset’s price.

The lifecycle of funding and trader progression

Evaluation/challenge phase: A period a prop company tests your trading skill & ability to follow instructions. During this time, you are expected to meet some targets without breaking their rules.

Funded account: An account with simulated capital where you earn real profit from.

Scaling plan: A system where the firm increases your account size as you prove consistency.

Maximum scaling: The absolute upper limit of capital a firm will allow a single trader to manage based on the program the trader chose.

Profit split: The percentage of profit kept by a trader and a prop firm. 80/20 split means the trader would take home 80 percent and the firm would take 20%.

Payout cycle: The frequency (how often) you can withdraw your profits.

Refund fee: Terms regarding the return of your initial evaluation fee after passing.

No time limit: A prop firm or program that has no deadline for your trading activity. You have the freedom to take as long as you need.

Time limit: A set time or period a prop firm expects you to complete a trading program.

Inactivity rule: A hidden “minimum” that states if you do not place a trade for X days (usually 30), your account is considered abandoned and breached.

Asset’s price measurement

Pip: Percentage in point is the smallest price move in a currency pair. It is the fourth decimal place in a forex asset’s value.

Tick: The smallest possible price movement in a market (common in Futures).