Prop Firm Glossary: 25 Key Terms Explained (2026)

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Last updated: June 2026

Reviewed by PropFirmProof Editorial Team — senior reviewer + verified prop trader. Affiliate disclosure · Edited June 17, 2026.

This glossary is for informational purposes. It does not constitute financial advice or a recommendation to use any specific prop firm. Trading involves risk of loss, and prop firm rules vary by firm and may change — always verify with the firm’s official documentation before trading.

Prop firm jargon trips up almost every trader entering the challenge world. The same word can mean two different things at two firms, and a single misread rule — trailing versus static drawdown, say — is enough to end a paid evaluation. This prop firm glossary defines the 25 terms that decide whether you pass a prop firm challenge, get paid, or breach. Each definition gives you plain English first, the precise mechanics second, and a real example with numbers. Use the alphabetical index below to jump to any term, or read straight through as a reference. For the bigger picture, start with what a prop firm is.

Quick Index

Blown Account · Challenge / Evaluation · Consistency Rule · Copy Trading / EA / HFT Restrictions · Daily Drawdown · Drawdown · Funded Account · Instant Funding vs One-Step vs Two-Step · KYC · Leverage · Lot Size Limit · Max Drawdown · News Trading Restriction · Payout Cycle · Profit Split · Profit Target · Refundable Fee · Reset / Retry Policy · Scaling Plan · Simulated vs Live Execution · Swap-Free / Islamic Account · FTMO-Style vs Rithmic-Style · Time Limit · Trailing Drawdown · Weekend / Overnight Hold

Drawdown

Drawdown is how much your account can fall before the firm closes it. It’s the single most important concept in this glossary because every prop firm caps it, and breaching the cap ends your account instantly — no warning, no appeal. Most firms measure it in two directions: a daily limit that resets each trading day, and an overall limit on total loss from your opening balance or peak equity. Both run at the same time.

Example: On a $100,000 account carrying a 10% maximum drawdown, your equity cannot drop below $90,000 at any point, or the account is gone.

Max Drawdown

Maximum drawdown (also called overall or total drawdown) is the largest total loss allowed across the life of an account, measured from a fixed reference point. When it is static, the floor never moves — it is locked to your opening balance regardless of how much profit you bank. This is the trader-friendly version, because profits build a cushion above an unchanging breach line.

Example: A $50,000 account under a static 8% max drawdown has a hard floor of $46,000. Grow it to $55,000 and the floor stays at $46,000 — giving you $9,000 of room.

Daily Drawdown

Daily drawdown is the maximum you can lose in a single trading day. It resets at a fixed time — usually 5:00 PM New York time — based on either your end-of-day balance or your highest equity that day. Cross it intraday and the account closes, even if your overall drawdown is healthy.

Example: A $100,000 account under a 5% daily drawdown locks at a $5,000 daily loss. Open the day at $102,000 and, at many firms, the day’s floor sits at $97,000.

Common misconception: Many traders think daily drawdown is measured from their starting balance. At most firms it is measured from your equity at the daily reset — so banking profit raises the floor you can breach against. A green day can quietly tighten the next morning’s limit.

Trailing Drawdown

Trailing drawdown is a maximum drawdown that moves up as your account hits new equity highs, then usually stops trailing once it reaches your opening balance. It is the most misread rule in prop trading. While you are in profit, the breach line chases your peak equity higher; lose ground after a winning streak and you can breach a level well above where you began.

Example: A $50,000 account under a $2,500 trailing drawdown starts with a $47,500 floor. Run equity to $54,000 and the floor trails to $51,500 — now $1,500 above the opening balance.

Common misconception: Traders assume a trailing drawdown follows closed balance only. Many firms trail on unrealized (intraday peak) equity, so a trade that spikes +$1,500 and then gives it back can lift your breach line even though you booked nothing. Check whether the firm trails on balance or equity before sizing up. Futures-style accounts often use this model — see how an instant funding account handles it.

Consistency Rule

A consistency rule caps how much of your total profit can come from a single day (or single trade). It exists to filter out traders who hit the target on one oversized gamble rather than steady execution. A common form is a 40% rule: no single day may account for more than 40% of your cumulative profit at payout.

Example: Under a 40% consistency rule, if your largest winning day is $4,000, your total profit must be at least $10,000 before you can withdraw — because $4,000 is 40% of $10,000.

Common misconception: The consistency rule is widely thought to apply only during the challenge. Several firms apply it to funded payouts too, so one huge day can lock your withdrawal until you trade enough additional volume to dilute it. Read the payout terms, not just the evaluation terms.

Profit Target

The profit target is the percentage gain you must reach to pass an evaluation phase. It is fixed per phase and per firm. Two-step challenges typically use a higher Phase 1 target and a lower Phase 2 target to confirm the result was repeatable rather than a single lucky run.

Example: A standard two-step evaluation sets 8% for Phase 1 and 5% for Phase 2. On a $100,000 account that is $8,000 then $5,000 in profit, hit without breaching any drawdown rule.

Profit Split

The profit split is the share of funded-account profits you keep, with the firm taking the rest. Most firms pay 80%–90% to the trader, and some scale the split upward as you stay funded. The split applies only after you pass and trade a funded account — never during the paid challenge.

Example: At a 90% profit split, $10,000 of funded profit pays you $9,000 and the firm $1,000. At an 80% split, the same profit pays you $8,000.

Challenge / Evaluation

A prop firm challenge (or evaluation) is the paid test you must pass to earn a funded account. You pay a one-time fee, hit a profit target inside the drawdown rules, and prove you can manage risk. Most challenges run on simulated accounts, so the firm carries no market risk during this phase. Account sizes usually range from $5,000 to $200,000 notional.

Example: A $100,000 two-step challenge typically costs $400–$600 and requires an 8% then 5% gain without breaching daily or max drawdown.

Funded Account

A funded account is the account you trade after passing the challenge. It holds the firm’s capital — never your own — and the firm absorbs trading losses up to the drawdown limit. Your downside stays fixed at the evaluation fee you already paid. The account may be live or simulated depending on the firm’s model.

Example: Pass a $100,000 challenge and you receive a $100,000 funded account. Earn $5,000 in profit at a 90% split and your first payout is $4,500 — your maximum personal loss remains the original fee.

Scaling Plan

A scaling plan is the firm’s rules for increasing your account size over time, usually tied to consistent profit and payout milestones. It rewards traders who stay disciplined across several payout cycles rather than chasing one big number. Terms vary widely — some firms double capital at set profit thresholds, others add fixed increments.

Example: A scaling plan might raise a $100,000 account by 25% every time you bank 10% profit across two payouts — taking you to $125,000, then $156,250, while the rules stay the same.

Time Limit

A time limit is the maximum number of calendar days allowed to complete a challenge phase. Older evaluations used a 30-day cap; most 2026 challenges advertise “no time limit,” meaning you can take as long as you need — though many still require a minimum number of trading days so you can’t pass in a single session.

Example: A “no time limit” challenge with a 5-day minimum lets you finish in 5 days or 5 months, but you must place at least one qualifying trade on five separate days before passing.

News Trading Restriction

A news trading restriction blocks or limits trades around high-impact economic releases. Firms impose it because news spikes cause slippage and gap risk they don’t want on their books. A typical window bans opening or closing positions 2–5 minutes before and after a flagged event such as a rate decision or jobs report.

Example: With a 2-minute news rule, a position opened 90 seconds before a Non-Farm Payrolls release can void the trade — or in stricter cases, fail the account.

Weekend / Overnight Hold

Weekend and overnight hold rules govern whether you can keep positions open past the trading day or into the weekend. Many futures and some forex firms require all positions flat before the close, while others permit holds with adjusted margin. Breaking a no-hold rule can close the position automatically or breach the account.

Example: A firm with a no weekend hold rule will auto-liquidate any open position at 3:55 PM ET Friday, booking whatever profit or loss exists at that moment.

Lot Size Limit

A lot size limit caps the maximum position size you can open, usually scaled to account size. It prevents traders from passing on a single outsized bet and exists alongside the consistency rule as a risk filter. Limits are stated in standard lots (forex) or contracts (futures).

Example: A $50,000 forex account may cap you at 5 standard lots per position. Attempt a 6-lot order and the platform rejects it or the firm flags a soft breach.

Copy Trading / EA / HFT Restrictions

These rules govern automated and replicated trading. EAs (Expert Advisors) are automated strategies; HFT is high-frequency trading; copy trading mirrors another account’s trades. Firms restrict them to varying degrees — some ban all automation, others allow EAs but ban latency arbitrage and tick-scalping bots. Copy trading across multiple funded accounts is frequently prohibited to stop strategy duplication.

Example: A firm may allow a manual EA that manages your own trades but ban any HFT system that opens and closes positions in under 60 seconds, treating sub-minute scalps as prohibited.

Payout Cycle

The payout cycle is how often you can withdraw funded-account profits. Cycles range from on-demand to fixed bi-weekly or monthly schedules, sometimes with a first-payout waiting period. Some firms tie the first withdrawal to a minimum number of trading days or a minimum profit.

Example: A 14-day payout cycle lets you request a withdrawal every two weeks. Firm payout totals (e.g. “$200M+ paid out”) are self-reported, so treat headline figures as marketing until independently verified. Read our FTMO review for one firm’s documented cycle.

Refundable Fee

A refundable fee is a challenge fee the firm returns — usually with your first payout — once you pass and trade funded. It is a marketing perk, not a guarantee, and it only applies if you clear the evaluation and meet any withdrawal conditions. Fail the challenge and the fee is not refunded.

Example: Pay a $540 fee on a $100,000 FTMO-style challenge, pass, and the $540 is added to your first funded payout — making the evaluation effectively free only if you succeed.

Swap-Free / Islamic Account

A swap-free or Islamic account removes overnight swap interest, which conflicts with Sharia law. Firms offer it for compliance and to traders who hold positions for days. Some charge a flat administration fee instead of swap, and a few restrict swap-free accounts to certain instruments.

Example: Hold a forex position for 5 nights on a standard account and you pay or earn daily swap; on a swap-free account that swap is zero, sometimes replaced by a fixed $5–$10 per lot admin charge.

KYC

KYC (Know Your Customer) is the identity verification a firm requires before releasing payouts. It typically means submitting a government ID and proof of address. Firms enforce KYC for anti-money-laundering compliance, and incomplete KYC is a common reason payouts stall — so complete it early, not at withdrawal time.

Example: Before your first $4,500 payout clears, a firm may require a passport scan and a utility bill dated within 90 days; a mismatched name or address can delay the transfer by days.

Leverage

Leverage is the ratio of position size to account capital the firm grants you. Higher leverage lets you control a larger position per dollar, amplifying both gains and losses. Prop firms express it as a ratio — common values are 1:30 to 1:100 for forex and lower for indices and metals. Leverage interacts with the drawdown rules, so a high ratio does not change your loss cap.

Example: At 1:100 leverage, $1,000 of margin controls a $100,000 position. The same trade at 1:30 needs roughly $3,333 of margin for the identical exposure.

Blown Account

A blown account — also called a drawdown breach — is an account closed for violating a drawdown or hard rule. The breach is immediate and final for that account: there is no recovery once equity touches the breach line. To trade again you buy a new challenge or use a reset.

Example: Breach the $5,000 daily drawdown on a $100,000 account by hitting a $5,001 intraday loss and the account closes that second — any open profit elsewhere does not save it.

Reset / Retry Policy

A reset (or retry) lets you restart a failed or in-progress challenge without buying a brand-new one, sometimes at a discount. Policies differ: some firms offer a free reset on a missed minimum-day requirement, others sell paid resets cheaper than a fresh challenge. A reset returns the account to its starting balance and rules.

Example: Fail a $100,000 challenge that cost $540, and a paid reset might cost $250 — cheaper than repurchasing, restoring the account to its $100,000 start.

Instant Funding vs One-Step vs Two-Step

These are the three challenge architectures. Two-step uses two evaluation phases before funding. One-step compresses this into a single phase. Instant funding skips evaluation entirely — you pay a higher fee and trade a funded account immediately, usually with tighter drawdown and a lower initial profit split. Each trades upfront cost against speed to payout.

Example: A two-step $100k challenge may cost $540; a one-step $450; an instant funding $100k account often costs $1,000+ but pays out without any evaluation. Compare options on our best prop firms list.

FTMO-Style vs Rithmic-Style

These describe two challenge ecosystems. FTMO-style refers to forex/CFD evaluations on MetaTrader or cTrader with percentage-based drawdown — the model FTMO popularised. Rithmic-style refers to futures evaluations routed through the Rithmic or Tradovate data feed, using dollar-based trailing drawdown and contract limits. The rules, platforms, and drawdown math differ enough that strategies rarely transfer cleanly between them.

Example: An FTMO-style $100k account uses a 10% ($10,000) percentage max drawdown; a Rithmic-style $100k futures account might use a $3,000 dollar trailing drawdown — a far tighter leash despite the same headline size.

Simulated vs Live Execution

This is the industry’s most important fine-print distinction. Simulated (demo) execution means your trades run on the firm’s internal pricing, not the live market — the standard for challenges and many funded accounts. Live execution means orders reach a real broker. Most prop firms operate simulated funded accounts and pay you from company revenue, which is legal and common but worth understanding before you size up.

Example: On a simulated funded account, your $4,500 payout comes from the firm’s balance sheet, not from a live broker fill — which is why a firm’s financial health and payout record matter as much as its rules.

Max Drawdown vs Daily Drawdown vs Trailing Drawdown

The three drawdown types are the most confused terms in this glossary. Side by side:

If you remember one thing: static drawdown rewards banked profit with a fixed cushion, while trailing drawdown can punish you for giving back gains. Beginners often do best starting with static-drawdown firms — see our beginner-friendly prop firms.

Disclaimer

This content is for informational and educational purposes only and is not financial advice or a recommendation to use any specific prop firm. Trading involves risk of loss, and most traders do not pass evaluation challenges. Past performance does not guarantee future results. Prop firm rules vary by firm and may change without notice — always review the firm’s full terms and conditions and official documentation before purchasing a challenge or trading. Firm payout totals cited anywhere on this page are self-reported by the firms unless stated otherwise. We may earn affiliate commissions from some firms listed, which does not affect our rankings or the definitions above.

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