Beginner Prop Firm Terms: The Starter Glossary

By PropTrader1 2 min read Published October 29, 2026

Affiliate Disclosure: FYI - this site contains affiliate links to services I think may suit you. If you make a purchase through these links, I may earn a commission at no extra cost to you. Some offers include discounts I have negotiated specifically for you.

Keep up to 90% of your profits. Start from €79.

Rewards up to 90% — the 1-Step pays from day one.
2-Step fee refunded in full with your first reward.
$650M+ paid to 4.5M+ traders — the 11-year standard.

Get the latest discount (affiliate link)

The beginner cluster defines the vocabulary every new prop trader meets in the first week: the firm, the trading, the account, the challenge and the trader it produces. Every entry is a short dated definition with a worked example, linked to the full guide.

Key Takeaways

A prop firm supplies capital and rules; you supply trading and an evaluation fee.
The challenge (evaluation) is the gate; the funded account is the prize; the payout is the point.
Almost all retail firm accounts are simulated - the split contract is the real product.

The Beginner Terms A-Z

Prop Firm - defined with a worked example and the full guide link.

Prop Trading - defined with a worked example and the full guide link.

Prop Firm Meaning - defined with a worked example and the full guide link.

Prop Trading Meaning - defined with a worked example and the full guide link.

Prop Trading vs Hedge Fund - defined with a worked example and the full guide link.

Prop Firm Account - defined with a worked example and the full guide link.

Funded Trading Account - defined with a worked example and the full guide link.

Funded Trader - defined with a worked example and the full guide link.

Prop Firm Challenge - defined with a worked example and the full guide link.

Evaluation - defined with a worked example and the full guide link.

Demo Account - defined with a worked example and the full guide link.

Simulated Account - defined with a worked example and the full guide link.

Next clusters: drawdown and risk rules and the payouts hub. The complete A-to-Z sits on the glossary index.

Plain-language risk education for leveraged trading is maintained by the ESMA investor corner.

Frequently Asked Questions

Why is a 50% drawdown harder to recover than a 10% one?

A 50% drawdown requires a 100% gain to recover, while a 10% drawdown only needs 11.1%. Recovery math is exponential. At 30% drawdown you need 42.9% to break even. This is why prop firms cap drawdown at 10-12% rather than higher percentages.

What is the 3-5-7 rule in forex?

The 3-5-7 rule suggests risking 1-3% per trade, keeping total open risk at 5% or less, and limiting single market exposure to 7%. It is a general risk guideline, not a prop firm rule, but following it naturally keeps you within most max drawdown limits.

What is a good maximum drawdown?

For prop firm trading, keeping your actual drawdown under 5% is excellent. Most firms allow 10-12%, but staying well below the limit demonstrates strong risk management and gives you a buffer for unexpected market events.

Is maximum drawdown calculated on balance or equity?

It depends on the firm and drawdown type. Static drawdown is typically calculated on starting balance. Trailing drawdown follows your highest equity. Some firms include floating losses in their calculation, making equity the relevant measure.

What happens when you breach maximum drawdown?

Breaching maximum drawdown results in immediate and permanent account closure. All positions are closed automatically, the challenge is terminated, and there is no refund or appeal. It is the final rule with no second chances.

What is the difference between daily drawdown and maximum drawdown?

Daily drawdown resets every day and limits your loss within a single session. Maximum drawdown is cumulative across the entire challenge or funded period. You can breach max drawdown through many small daily losses that accumulate over time.