TRADING GLOSSARY
TRADING TERMS & DEFINITIONS
Every trading term defined clearly — from drawdown and R-multiple to prop firm jargon and behavioral biases. Updated April 2026.
A
- Account Size
- The initial capital allocated to a trading account. For prop firms, this is the evaluation account size (e.g., $50K, $100K). Profit targets, drawdown limits, and position sizing are all calculated relative to account size.
- Anchoring Bias
- A cognitive bias where traders rely too heavily on the first price they saw or the entry price of a trade, preventing rational decision-making on exits. Common cause of holding losers too long. Learn more
- Apex Trader Funding
- A US-based futures prop firm offering funded accounts via a trailing drawdown evaluation model. No daily loss limit but a trailing max loss that follows equity highs. Learn more
B
- Backtesting
- Running a trading strategy against historical market data to evaluate its performance before risking real capital. Backtests are subject to curve-fitting bias and should be followed by forward testing.
- Breach
- Violating a prop firm rule — typically hitting the daily drawdown or maximum loss limit. A breach fails the challenge or funded account immediately and cannot be reversed.
C
- Challenge
- The evaluation phase of a prop firm account. Traders must meet a profit target while respecting drawdown rules to pass and receive a funded account.
- Confirmation Bias
- Seeking out information that confirms existing beliefs about a trade while ignoring contradictory evidence. A leading cause of holding losers and ignoring exit signals. Learn more
- Consistency Rule
- A prop firm rule preventing a single day's profits from exceeding a fixed percentage of the total profit target. Prevents traders from passing via a single lucky trade.
D
- Daily Drawdown
- The maximum percentage loss allowed in a single trading day. Calculated from the balance (or equity) at the start of the day. Breaching this limit at any point during the session fails the account immediately.
- Discipline Score
- A 0–100 metric measuring trading discipline across five axes: Consistency, Risk Management, Emotional Control, Strategy Adherence, and Session Quality. Developed by TILT to quantify behavioral trading performance. Learn more
- Disposition Effect
- The tendency to sell winners too early and hold losers too long. One of the most documented behavioral biases in retail trading. Learn more
- Drawdown
- The peak-to-trough decline in equity, expressed as a percentage or dollar amount. Used to measure risk exposure and as the main failure criterion in prop firm evaluations.
E
- EA (Expert Advisor)
- An automated trading script that executes trades algorithmically on MetaTrader 4/5. Most prop firms allow EAs but prohibit specific strategy types like HFT or latency arbitrage.
- Edge
- A statistical advantage in a trading strategy that produces positive expected value over a large sample of trades. Without an edge, even perfect discipline cannot produce long-term profitability.
- Equity
- The current value of a trading account including open position P&L. Differs from balance, which only reflects closed trades. Some prop firms calculate drawdown from equity; others from balance.
F
- FOMO (Fear of Missing Out)
- An emotional state where a trader enters a position because the market is moving without them, rather than because of a valid signal. A leading cause of late, oversized, and poorly-timed entries. Learn more
- FTMO
- A Czech-based prop firm offering funded accounts up to $200K via a two-phase evaluation (Challenge + Verification). The benchmark most other prop firms are compared against. Learn more
- Funded Account
- A trading account backed by a prop firm's capital. Traders keep a share of profits (typically 80–90%) after passing the evaluation phases.
L
- Leverage
- The ratio of position size to account capital. A 1:100 leverage means a $1,000 account can control $100,000 of currency. Prop firms typically cap leverage at 1:30 to 1:100.
- Loss Aversion
- The psychological tendency to weigh losses as roughly twice as painful as equivalent gains. Causes traders to hold losers and exit winners prematurely. Learn more
- Lot Size
- The standardized volume unit for forex trades. A standard lot = 100,000 units. Mini lot = 10,000. Micro lot = 1,000. Lot size multiplied by pip value determines dollar risk per pip.
M
- Max Loss
- The total percentage loss allowed over the lifetime of a prop firm account. Typically 6–10%. Breaching the max loss at any point fails the account permanently.
- Minimum Trading Days
- A prop firm rule requiring a minimum number of active trading days before the evaluation phase can be submitted. Prevents passing on a single lucky session.
O
- Overtrading
- Taking more trades than the strategy signals, often driven by boredom, revenge, or FOMO. Dilutes edge and inflates commission/spread costs. A leading cause of prop firm failures. Learn more
P
- Pip
- The smallest standard price movement in a forex pair. For most pairs, 1 pip = 0.0001 (or 0.01 for JPY pairs). Position size × pip value = dollar P&L per pip move. Learn more
- Position Sizing
- The process of determining how many units, lots, or contracts to trade based on account size, risk per trade, and stop loss distance. Proper position sizing is the foundation of risk management. Learn more
- Profit Split
- The percentage of profits a funded trader retains after passing the prop firm evaluation. Typical ranges from 75% to 90%, with higher splits often reserved for senior funded traders or scaling plans.
- Profit Target
- The percentage or dollar profit required to pass a prop firm evaluation phase. Common targets: 10% for Phase 1, 5% for Phase 2.
- Prop Firm
- A proprietary trading firm that funds retail traders after they pass an evaluation. Traders pay an evaluation fee and receive a funded account with profit splits after demonstrating consistent profitability. Learn more
R
- R-Multiple
- A normalized unit measuring trade outcome as a multiple of initial risk. If you risked $100 and made $300, that's a +3R trade. Allows comparing trade quality regardless of position size or account size.
- Recency Bias
- Weighting recent events more heavily than historical data when making trading decisions. Causes traders to abandon proven strategies after a short losing streak. Learn more
- Revenge Trading
- Taking impulsive, oversized trades to recover losses after a losing trade or day. The single largest source of catastrophic losses in retail trading. Learn more
- Risk-Reward Ratio
- The ratio of potential profit to potential loss on a single trade. A 1:3 RR trade risks $1 to make $3. Strategies with RR above 1:2 can be profitable even with win rates below 50%. Learn more
- Risk per Trade
- The percentage of account capital risked on a single trade. Conservative traders risk 0.5–1%. Standard risk management caps at 2% to survive losing streaks.
S
- Scaling Plan
- A prop firm program that increases a funded trader's account size after reaching profit milestones. Allows traders to grow from $100K to $1M+ without purchasing additional challenges.
- Slippage
- The difference between expected execution price and actual fill price, caused by fast-moving markets or low liquidity. Particularly impactful during news events.
- Stop Loss
- A pre-defined price level at which a losing trade is closed automatically. The foundation of risk management — trading without a stop loss exposes the account to unlimited risk.
- Sunk Cost Fallacy
- Continuing to hold a losing trade because of capital already invested, rather than evaluating the trade on its current merits. Learn more
T
- Take Profit
- A pre-defined price level at which a winning trade is closed automatically to lock in gains. Combined with stop loss, defines the trade's risk-reward ratio.
- Tilt
- An emotional state (borrowed from poker) where rational decision-making breaks down after a loss or frustration. Tilt is behind most revenge trades and oversized positions.
- Topstep
- A US-based futures prop firm offering funded accounts via a Trading Combine evaluation. 90% profit split and strict no-overnight-holding rules. Learn more
- Trailing Drawdown
- A drawdown calculation method where the maximum loss limit trails the highest equity point reached. Used by Apex — locks in profits but creates an invisible rising floor.
W
- Win Rate
- The percentage of trades that close profitably. A common misleading metric — high win rates with low RR can be less profitable than low win rates with high RR.
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