Prop firm terms explained
Plain definitions of the terms used throughout the prop trading industry, with examples and how each applies in practice.
What is a funded account?
A funded account is the account a trader receives after passing a prop firm's evaluation, on which they can earn payouts from profits under the firm's terms. In most challenge-based firms it is a simulated account: profits are calculated from live prices, and payouts are paid by the firm from its revenue.
What is a challenge fee?
A challenge fee is the price a trader pays a prop firm to attempt an evaluation. It buys an account of a set size with set rules for one attempt. The fee is usually not refunded if the trader breaches a rule, though some firms refund it with the first payout to traders who pass.
What is an evaluation phase?
An evaluation phase is the stage in which a trader must meet a profit target without breaking any rules to qualify for a funded account. One-step programmes have one evaluation phase; two-step programmes have two, usually with a lower target in the second. Each phase is typically a separate account.
What is a verification phase?
A verification phase is the second stage of a two-step prop challenge. After passing the first phase, the trader must prove consistency by meeting a lower profit target, often around 5%, under the same loss limits. Passing verification leads to a funded account.
What is a reset in a prop firm?
A reset gives a trader a fresh attempt at a challenge, usually at a discount, after they breach a rule or want to start over. In practice it is a new account of the same size and rules. Resets are an important revenue stream and a way to keep traders who failed engaged.
What is a payout cycle?
A payout cycle is the regular period after which a funded trader can request a payout, such as every 14 or 30 days. Firms often set a waiting period before the first payout and may require minimum trading days or a minimum profit in each cycle. The cycle determines how often money leaves the firm.
What is a scaling plan?
A scaling plan increases a funded trader's account size after consistent results, such as several profitable payout cycles without a breach. It rewards and retains skilled traders, and for the firm it concentrates payout risk in its most successful traders. Clear criteria and a maximum size are essential.
What is a drawdown?
Drawdown is a decline in account value from a reference point, measured in money or percentage. In prop trading it usually means the loss from the starting balance, from the day's opening value, or from the highest equity reached. Drawdown limits are the main rules that end evaluation accounts.
What is equity drawdown?
Equity drawdown is a decline measured on equity, meaning the account balance plus the floating profit or loss of open positions. It captures losses on trades that have not been closed yet, which is why most prop firms measure their loss limits on equity rather than on balance alone.
What is a high-water mark?
A high-water mark is the highest value an account has reached. In prop trading it is the reference for trailing drawdown, whose floor sits a set distance below it, and in some payout models profit is only paid on gains above the previous high-water mark. It only ever moves up.
What is a breach?
A breach is a violation of a prop firm's hard rule, such as the daily or maximum loss limit, that ends the trading account. A breached account stops trading and cannot pass. Firms record the rule, time and figures involved, and often offer the trader a discounted reset.
What is the difference between a hard breach and a soft breach?
A hard breach ends the account immediately, typically for loss limits. A soft breach is a rule violation that does not end the account but has a consequence, such as a refused order, profits removed from certain trades, or a review before payout. Firms use soft rules for behaviour that needs judgement.
What counts as a trading day in prop firm rules?
A trading day is usually any calendar day on which the trader opened at least one trade, counted in a fixed time zone. Minimum trading day rules require a number of such distinct days before passing or requesting a payout. Some firms also require each day's activity to meet a minimum.
What is the daily reset time in prop firm rules?
The daily reset time is the moment the trading day rolls over for day-based rules: the daily loss limit's reference is recalculated, daily counters restart and a new trading day begins. Firms usually use midnight in a fixed time zone such as UTC, or their server's time.
What is a challenge pass rate?
A challenge pass rate is the share of evaluation attempts that end in a pass. It is one of the main numbers in a prop firm's economics, because it determines how many funded accounts, and therefore how much payout liability, each batch of sales creates. Few firms publish audited pass rates.
What is a prop firm affiliate?
A prop firm affiliate is a partner who promotes a firm's challenges and earns a commission on the sales they generate, usually tracked through links or discount codes. Affiliates include trading influencers, educators, communities and review sites. They are a major acquisition channel because they are paid only when they deliver a sale.
What is a broker-backed prop firm?
A broker-backed prop firm is a prop firm owned by, or closely partnered with, a brokerage. The broker may provide the trading platform, the price feed, and sometimes real execution for funded traders. Traders sometimes see broker backing as a sign of stability, though it also brings the broker's regulatory constraints.
What is a B2B prop technology provider?
A B2B prop technology provider sells software and services to prop firms rather than to traders: trading platforms, rule and risk engines, CRMs, trader dashboards, payment and KYC integrations, or complete turnkey stacks. Firms choose providers based on price model, features, flexibility and data access.