Trading Glossary
32 essential trading terms explained for prop-firm and algorithmic traders.
Prop Firm Basics
- Prop Firm — A proprietary trading firm that funds approved traders with company capital in exchange for a profit split.
- Prop Firm Challenge — The evaluation phase where a trader must hit a profit target while respecting drawdown limits to qualify for funded capital.
- Profit Target — The percentage gain required to pass a challenge phase, typically 5-10% per phase.
Prop Firms
- FTMO — Prague-based prop firm founded in 2015, considered the gold standard of retail prop trading.
- FundedNext — Dubai-based prop firm offering 1-step or 2-step evaluations with a focus on faster funding.
- TopStep — A futures-only prop firm based in Chicago, known for stable rules and a long track record.
- Apex Trader Funding — A futures prop firm offering 100% profit split on the first $25,000 of trader profits.
Risk
- Maximum Drawdown — The largest peak-to-trough decline in account equity, measured as a percentage of starting balance.
- Daily Drawdown — The single-day loss limit, typically 5% of starting balance, that resets at a fixed UTC time.
- Trailing Drawdown — A drawdown measured from peak equity rather than starting balance — the floor rises as you make money.
Funded Account
Forex Basics
- Pip — The smallest unit of price change in a forex pair — the 4th decimal for most pairs, 2nd decimal for JPY pairs.
- Lot — A standard forex position size — 100,000 units of the base currency.
- Leverage — The ratio of your trading capital to the position size you can control — e.g. 1:30, 1:100, 1:500.
- Spread — The difference between bid (sell) and ask (buy) prices — the broker's implicit fee on every trade.
Indicators
Order Types
Strategy
- Risk-Reward Ratio — The ratio of potential loss to potential gain on a trade — e.g. 1:2 means risking $1 to make $2.
- Win Rate — The percentage of trades that close in profit — a key metric, but meaningless without risk-reward context.
- Expectancy — The average profit (or loss) you can expect per trade.
Performance Metrics
Software
- EA (Expert Advisor) — An automated trading program that runs on MetaTrader 4 or 5.
- MT4 (MetaTrader 4) — The most widely-supported retail forex trading platform, released in 2005.
- MT5 (MetaTrader 5) — The successor to MT4, supporting more asset classes and faster backtesting.
- cTrader — A modern trading platform alternative to MetaTrader, popular among algorithmic traders.
Concepts
- Algorithmic Trading — Trading executed by computer programs based on predefined rules.
- Backtesting — The process of testing a strategy against historical price data.
- Walk-Forward Analysis — A backtesting method that splits historical data into rolling train/test windows.
- Overfitting — When a strategy is so tuned to historical data that it fails on live trading.