Prop firm trading has exploded in popularity — and for good reason. It offers retail traders the chance to trade with significant capital without risking their own savings. But prop firms have their own vocabulary, rules, and traps. Here’s what every term means and how it affects your chances of passing the challenge.
Trading involves risk. Challenge fees are non-refundable. Most traders do not pass the evaluation on their first attempt. This glossary is for educational purposes only.
Prop Firm Terms
Evaluation Phase
The first stage of a prop firm challenge where you must prove your trading ability. Typically requires reaching a profit target (8-10%) while respecting drawdown limits and consistency rules. Most evaluation phases have no time limit (FTMO, Blue Guardian) or a 30-day minimum trading period. The evaluation is designed to filter out gamblers — consistent, disciplined traders pass (see which strategies work best for evaluations →).
Example: FTMO’s evaluation requires 10% profit with max 20% drawdown. Trade minimum 10 days. Achieve both within no time limit to pass. If you hit 10% profit but exceed 20% drawdown — fail. Risk management matters more than profit.
Profit Split
The percentage of profits you keep as a funded trader. Standard splits range from 70/30 (you keep 70%) to 90/10 (you keep 90%). Higher profit splits are better, but they often come with stricter rules or higher challenge fees. Some firms increase your split over time as you prove consistency. The profit split is your primary income as a funded trader (compare prop firm returns vs retail forex →).
Example: You pass a $100K challenge with 80/20 split. You make $6,000 profit in your first month. You keep $4,800. The firm keeps $1,200. On a retail account, you’d keep all $6,000 — but you’d also risk your own $100K.
Max Drawdown
The maximum your account balance can fall from its peak before you fail the challenge or lose your funded account. Two types: relative drawdown (from account peak) and absolute drawdown (from starting balance). Most prop firms use relative drawdown. This is the single most important number in any prop firm challenge — most failures come from hitting the drawdown limit, not missing the profit target (master drawdown management →).
Example: $100K account with 10% max drawdown. Your account grows to $108K. Your max drawdown is now 10% of peak = $10,800. Your equity cannot fall below $97,200. This is more restrictive than 10% of starting balance ($90K).
Daily Loss Limit
The maximum you can lose in a single trading day (typically 5% of account balance). Exceeding this limit fails the challenge immediately — even if your overall drawdown is fine. The daily loss limit is designed to prevent revenge trading after a loss. It forces discipline: if you hit 5% down, you stop for the day (see related risk management terms →).
Example: Your $100K account has a 5% daily loss limit ($5,000). You lose $3,000 in the morning. You can still risk $2,000 more — but not a penny more. If you lose $5,001 in a single day, the challenge is over.
Consistency Score
A metric that measures how evenly distributed your profits are across trading days. Prop firms want traders who generate steady returns, not lottery players who hit one huge trade. Typical rule: no single day should account for more than 20-30% of total profit. If you make 8% profit but 7% came from one trade, you fail consistency (consistent strategies beat one-hit wonders →).
Example: You make 10% profit over 10 days. Day 1: 0.5%, Day 2: 1.2%, Day 3: -0.3%… Day 7: 8% (one huge trade). Your consistency score fails — one day is 80% of total profit. Even though you hit the profit target, you don’t pass.
Verification Phase
The second stage after passing evaluation. Rules are identical or slightly easier (e.g., lower profit target). The verification phase exists to confirm your evaluation results weren’t luck. Some firms skip this (one-phase challenges), but most require it. After verification, you get a funded account (compare prop firm vs retail trading →).
Example: FTMO has two phases: Evaluation (10% target) and Verification (5% target). Both have same drawdown rules (20% max, 5% daily). Pass both → funded account with 80% profit split.
Scaling Plan
A program that increases your funded account size as you prove consistent profitability. Typical scaling: every 3-4 months of consistent profits → account increases by 25-50%. Scaling transforms a $10K account into $100K+ over time. This is the long-term incentive that keeps funded traders disciplined (learn the psychology of consistent trading →).
Example: FTMO scales accounts by 25% every 4 months (up to $400K per trader). Starting at $100K: $125K → $156K → $195K → $244K in 16 months of consistent profits.
Challenge Fee
The upfront cost to attempt a prop firm challenge. Typically ranges from $50 (for a $5K account) to $1,000+ (for a $200K account). The fee covers administration, platform costs, and the firm’s risk. Challenge fees are non-refundable — you lose the fee whether you pass or fail. Treat it as tuition, not a deposit (budget for multiple attempts →).
Example: FTMO charges $155 for a $10K challenge. Even if you fail, the fee doesn’t return. Budget for 2-3 attempts ($310-$465) — most traders don’t pass on the first try.
Funded Account
A live trading account funded by the prop firm — you trade with their capital and split the profits. You don’t own the account; the firm can revoke it if you violate rules. Funded accounts come with ongoing conditions: consistency requirements, maximum position size, and drawdown limits. Violate them and you’re back to evaluation (see which platforms prop firm traders use →).
FTMO
The largest and most recognized prop trading firm globally. Founded in 2015, FTMO offers accounts from $10K to $400K with 80% profit split. Two-phase evaluation (10% + 5%), max 20% drawdown, 5% daily loss limit. FTMO has set the industry standard — most other prop firms model their rules after FTMO (compare FTMO with other trading options →).
Example: FTMO processed over $500M in profit payouts to funded traders. Their 2-phase model and 80/20 split have become the benchmark that other prop firms compete against.
Next Steps
Now that you understand prop firm terms, here’s what to learn next:
Risk Management for Prop Firms → — Master the drawdown rules that make or break challenges.
Forex Terminology → — Most prop firm trading is forex — know the terms.
Compare Prop Firm Alternatives → — See how prop firms compare to retail forex trading.
Challenge fees are non-refundable. Most traders do not pass the evaluation on their first attempt. Never pay for a challenge with money you cannot afford to lose. This glossary is for educational purposes only.
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