The total amount of capital in the trader’s account, including both profits and losses. The trailing drawdown is based on the balance relative to the highest equity point, and the limit changes as the balance increases.
Account Funding
The process through which a trader gains access to capital from a prop firm after passing the evaluation. This funding allows the trader to trade with real capital rather than simulated money.
Account Monitoring
The ongoing observation of a trader’s performance to ensure they are adhering to risk management rules, including trailing drawdown limits. Prop firms continuously monitor accounts to protect their capital and ensure traders are operating within defined parameters.
Account Reset
The process where the evaluation account or performance account is reset, usually after a trader exceeds the drawdown limits. In trailing drawdown, this reset typically happens if the trader's equity falls below the adjusted drawdown threshold.
Account Transfer
The process by which a trader moves from an evaluation account to a funded performance account, typically after meeting the necessary criteria. This is an important step for traders who pass the evaluation.
Account Verification
A process in which the trader’s identity and trading performance are verified before they are granted access to a funded account or payout. This may include document submission or reviewing trading history.
Advanced Challenge
An evaluation program that is more rigorous than a standard evaluation, often featuring tougher risk management criteria and higher profit targets, but also with greater potential rewards once passed.
Combined Evaluation
Some prop firms allow traders to combine results from multiple trading strategies or accounts to meet evaluation criteria, such as combining profits from different asset classes or markets.
Closed Drawdown
The realized loss after a position is closed. A trailing drawdown refers to this realized loss and compares it to the peak balance to determine whether the trader is within acceptable risk limits.
Daily Loss Limit
The maximum amount a trader is allowed to lose in a single day during the evaluation phase. If this limit is hit, the evaluation is failed, and the trader may be disqualified.
Drawdown
A reduction in the equity of a trading account from its peak value. It represents the amount of loss a trader experiences before the account begins to recover. Trailing drawdown specifically reduces the drawdown limit as profits increase.
Drawdown Limit
The amount of total drawdown a trader’s account can experience before the account is closed or funding is revoked. This is typically a percentage of the starting capital.
Drawdown Limits
The maximum allowable loss from the highest point (peak) of the account to the lowest point (trough) during the evaluation phase. Exceeding this limit results in the trader failing the evaluation.
Evaluation Account
A demo or simulated account provided to traders during the evaluation phase. This account has real market conditions but no actual financial risk for the trader, allowing them to prove their trading ability.
Evaluation Failure
When a trader exceeds the trailing drawdown limit (i.e., the drawdown from the highest equity point), they fail the evaluation process. This is often marked by an account closure or disqualification.
Evaluation Fee
The upfront fee paid by the trader to participate in the evaluation process. This fee is often non-refundable, but some firms offer a refund or credit towards a funded account if the trader passes the evaluation.
Evaluation Phase
The initial period where traders are assessed based on their ability to meet specific trading criteria (e.g., profit target, drawdown limits, risk management) before being given access to a funded account.
Evaluation Reset
The process of resetting a trader’s evaluation if they fail to meet the required criteria, such as drawdown limits or profit targets. This may require an additional fee and a new trading period.
Evaluation/Challenge
The process by which traders prove their skills to a prop firm in order to gain access to a funded account. Traders must meet certain profit goals and risk management criteria within a set time frame to pass the evaluation.
Equity Curve
A graphical representation of the changes in a trader’s account equity over time. It shows both gains and losses, and in the case of trailing drawdown, it visually illustrates how the drawdown limit moves along with the account balance.
Equity High (Peak)
The highest balance or value that a trader’s account reaches. The trailing drawdown is based on this equity high and will move upwards as profits grow but will stay at the highest level once the account balance drops below this peak.
Equity Recovery
The process of the account balance increasing back to previous levels after a loss. In the context of trailing drawdown, recovery is particularly important, as the drawdown threshold moves upward with higher equity, allowing the trader more room to recover.
Failure Criteria
The specific conditions under which a trader fails the evaluation. This typically includes violating drawdown limits, failing to hit the profit target, or not meeting the trading criteria within the allowed time.
Floating Drawdown
The unrealized loss of an open position or account balance that fluctuates as market conditions change. In the context of trailing drawdown, floating drawdown refers to how much an account is currently down from its peak but not yet closed out.
Funded Account
A live trading account funded by the prop firm, provided to traders who successfully pass the evaluation phase. The trader now trades with real capital while following the firm’s risk and performance guidelines.
Funding Allocation
The amount of capital given to the trader to trade, which is subject to trailing drawdown rules. As profits accumulate, the funding allocation may increase, allowing the trader to take on larger positions while maintaining lower risk.
High Watermark
The highest value that the account has reached. In a trailing drawdown system, the high watermark sets the level from which the drawdown will be calculated. If the balance exceeds the previous high watermark, the trailing drawdown moves up, but it will never rise again if the balance decreases.
Instant Funding
A program or feature that allows traders to skip the traditional evaluation and gain access to a funded account immediately, typically after providing a one time fee or completing certain pre-qualification steps.
Leverage
The use of borrowed capital to increase the potential return on an investment. Prop firms often offer traders leverage, allowing them to control larger positions than their available capital.
Leverage Limits
The maximum leverage a trader is allowed to use during the evaluation and in the funded account. Prop firms often set these limits to control risk exposure and protect both the trader and the firm's capital.
Loss Threshold
The maximum allowable loss (as a percentage of the highest equity value) that a trader can experience before their account is deactivated or their evaluation is failed. The loss threshold in trailing drawdown is calculated from the peak balance.
Max Daily Loss
The maximum loss a trader is allowed to incur in a single day. Once this limit is reached, the trader’s account is either paused, or they are disqualified from the evaluation, depending on the prop firm's rules.
Max Drawdown
The maximum allowable loss in a trader's account from peak to trough. Exceeding this drawdown results in the trader losing their funded account or failing the evaluation.
Max Loss Rule
The rule that determines the maximum loss a trader is allowed before being disqualified. Trailing drawdown is part of the max loss rule, as it limits the total loss in relation to the account’s peak value, which moves as profits increase.
Maximum Position Size
The largest position a trader can take on during the evaluation phase and in their performance account. This limit helps control risk and ensure the trader is not overexposing themselves to any one trade.
Minimum Trading Days
Some prop firms require traders to trade a minimum number of days during the evaluation to prove consistency. This ensures the trader is not just reaching the profit target with a few lucky trades.
Profit Locking
A feature that prevents profits from being wiped out by allowing the drawdown limit to trail higher as profits are made. This is the core concept of trailing drawdown—protecting profits by adjusting the loss limit as the account balance increases.
Profit Target
The minimum profit a trader must achieve in an evaluation or challenge to pass and get a funded account. For example, if the target is 10% profit, the trader must reach that goal within the allocated time.
Profit Target Extension
An extension of time or trading conditions granted to a trader in the evaluation phase if they are close to meeting their profit target but need more time to complete the challenge.
Payout
The process of transferring a trader's share of the profits after reaching certain milestones or at regular intervals (e.g., monthly). The payout is based on the trader’s profit split agreement.
Payout Threshold
The level of profits that a trader must reach before being eligible for a payout. While the trailing drawdown system is about managing risk, the payout threshold ensures the trader can withdraw a share of the profits once they exceed a set amount.
Performance Account
A live account given to traders who have successfully passed the evaluation. It allows the trader to manage real funds, and they are usually subject to a profit split and ongoing performance monitoring.
Performance Evaluation
The ongoing assessment of a trader's results after they move to a funded account. It often includes tracking profits, losses, and risk management, and may affect the trader's ability to scale up their capital.
Profit Split
The percentage of profits that a trader keeps after a successful trade. For example, a 75% profit split means the trader gets 75% of the profits, while the firm keeps the remaining 25%.
Refund Option
Some prop firms offer a refund option where the trader can get back the fees paid for the evaluation if they pass the challenge and are funded.
Reaching the Drawdown Limit
This occurs when the account's equity drops to a level where it exceeds the allowable drawdown limit, causing the trader to fail the challenge or have their account closed. With trailing drawdown, this limit moves in accordance with the highest equity point.
Risk Management
The strategies or rules set by the prop firm to protect against large losses. In trailing drawdown, the risk management strategy includes ensuring that the trader’s maximum allowable loss decreases as the account balance grows.
Risk Management Rules
A set of guidelines enforced during the evaluation phase, which may include stop-loss limits, daily loss limits, or position sizing rules designed to ensure the trader manages risk effectively.
Risk-to-Reward Ratio
The ratio of potential loss to potential profit on a trade. While this is a concept applied to individual trades, understanding the risk-to-reward ratio can help traders manage their accounts within the limits of a trailing drawdown system.
Scaling Algorithm
An automatic system that increases the trader’s capital in their performance account as they consistently meet or exceed profit targets and maintain good risk management throughout the evaluation and live trading phases.
Scaling Plan
A system where a trader’s capital allocation increases as they demonstrate consistent profitability and good risk management. This allows traders to access more funds and potentially earn higher profits.
Simulation
A demo or simulated account that allows traders to practice trading strategies without risking real money. Prop firms often use simulations in their evaluation process before moving traders to funded accounts.
Stop-Loss Order
An order to close a trade at a specific loss level to protect from further losses. While a stop-loss is applied to individual trades, the trailing drawdown refers to the overall account balance and moves accordingly based on the equity highs.
Step-Up Evaluation
Some prop firms use a tiered evaluation system, where traders must meet progressively more challenging criteria (e.g., higher profit targets or lower drawdown limits) to access larger performance accounts.
Trailing Drawdown
A type of drawdown that moves in the direction of the account balance. It is designed to lock in profits by reducing the drawdown threshold as the account balance increases, but it never increases as the balance decreases. This allows the trader to take more risk as they earn profits, while protecting the firm’s capital.
Trailing Drawdown Adjustment
The process where the trailing drawdown value is automatically recalculated based on the highest equity value. As the account grows, the drawdown limit adjusts accordingly, allowing the trader more room to operate without triggering a failure.
Trailing Stop
A stop-loss order that moves with the market price. While a trailing stop applies to individual trades, trailing drawdown applies to the overall account balance. Both are used to lock in profits and limit losses, but trailing drawdown affects the entire account, while a trailing stop is specific to a trade.
Trade Copier
A tool that allows traders to copy trades from another account or trader. Some prop firms offer trade copiers to help less experienced traders mimic successful strategies.
Trade Rules
The set of regulations and guidelines under which a trader must operate, such as position size limits, stop-loss requirements, and risk management rules, including those specific to the trailing drawdown system.
Trade Size Limits
The maximum size of a trade that a trader can take during their evaluation phase or in their performance account. These limits help control risk and ensure the trader adheres to risk management strategies.
Trading Period
The designated time frame within which a trader must complete the evaluation, meet their profit target, and stay within drawdown limits. Exceeding the allowed trading period typically results in disqualification.
Trial Period
Some prop firms offer a trial period for new traders to test their systems or evaluation process without committing to full fees. This trial phase allows traders to get a feel for the trading rules before committing to a full evaluation.
Withdrawal Process
The procedure by which a trader can withdraw profits from their performance account. This often involves meeting certain criteria like minimum trading days or meeting the payout threshold.
Withdrawal Policy
The set of guidelines established by a prop firm regarding when and how
traders can withdraw their profits. This policy may include limits on frequency, minimum withdrawal amounts, or conditions based on account performance.
Options Trading Terms
Call Option
A financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as stocks) at a specified price (strike price) within a certain period.
Put Option
A financial contract that gives the holder the right, but not the obligation, to sell an underlying asset at a specified price (strike price) within a certain
period.
Strike Price
The price at which the holder of an options contract can buy (call) or sell (put) the underlying asset.
Expiration Date
The last day on which an options contract can be exercised. After this date, the option expires and becomes worthless.
Premium
The price paid for an options contract. It is the cost of acquiring the right to buy or sell the underlying asset.
In the Money (ITM)
A term used to describe an option that has intrinsic value. For a call option, this occurs when the stock price is above the strike price. For a put option, it occurs when the stock price is below the strike price.
Out of the Money (OTM)
An option that has no intrinsic value. For a call option, this happens when the stock price is below the strike price. For a put option, this happens when the stock price is above the strike price.
At the Money (ATM)
A situation where the strike price of an option is equal to the current market price of the underlying asset.
Implied Volatility (IV)
The estimated volatility of the underlying asset’s price over the life of the options contract, as reflected in the options premium. Higher implied volatility usually results in higher options premiums.
Delta
A measure of how much an option's price is expected to change when the price of the underlying asset changes. For example, a delta of 0.5 means the option price will change by 50 cents for every dollar change in the underlying asset.
Theta
A measure of the time decay of an option, indicating how much the price of an option decreases as time passes, all else being equal. Options lose value as they approach their expiration date.
Gamma
A measure of how much an option’s delta will change as the price of the underlying asset changes. Gamma is highest when an option is at the money.
Vega
A measure of how much an option’s price will change with a 1% change in the volatility of the underlying asset. A higher vega means the option is more sensitive to changes in volatility.
Covered Call
A strategy where an investor holds a long position in an asset and sells a call option on the same asset. This strategy is often used to generate income.
Naked Call
A strategy where an investor sells a call option without owning the underlying asset. This is a high-risk strategy as the seller faces unlimited potential losses.
Iron Condor
A popular options strategy that involves holding a combination of bear call spreads and bull put spreads to benefit from low volatility in the underlying asset.
Straddle
A strategy where the investor buys both a call option and a put option with the same strike price and expiration date, betting on high volatility.
Strangle
A strategy where the investor buys a call option and a put option with different strike prices but the same expiration date, betting on volatility.
