Entering the world of prop trading is like learning a new language. The industry is filled with specialized jargon, technical terms, and acronyms that can be confusing to a beginner. Understanding this vocabulary is not just about sounding like a professional; it’s a critical step in developing a disciplined mindset, communicating effectively with peers, and mastering the concepts of risk, strategy, and market dynamics. This comprehensive glossary is designed to help beginners navigate the jargon of prop trading, providing clear definitions and context for the most essential terms.

I. General Trading & Market Terms 📊

These are the foundational terms every trader, regardless of their chosen market, must know.

• Bid/Ask Spread: The difference between the highest price a buyer is willing to pay for an asset (the bid) and the lowest price a seller is willing to accept (the ask).
  • Why it Matters: This spread is a direct measure of an asset’s liquidity. A tight spread indicates high liquidity and lower transaction costs, while a wide spread signals low liquidity and higher costs. As a trader, a tight spread is generally more favorable for entering and exiting positions efficiently.
• Volatility: A statistical measure of the dispersion of returns for a given asset. It represents the degree of variation in a trading price over time. High volatility means prices can change dramatically in a short period.
  • Why it Matters: Volatility is the source of all opportunity for a trader. It’s what creates price movement, allowing for profit. However, high volatility also increases risk, as prices can move against a position just as quickly as they move in its favor.
• Liquidity: The degree to which an asset can be quickly bought or sold in the market without affecting the asset’s price.
  • Why it Matters: Liquidity is a trader’s best friend. High liquidity ensures you can enter and exit trades at or near your intended price. Trading illiquid assets can result in significant slippage, where your actual execution price is much worse than your intended price.
• Slippage: The difference between the expected price of a trade and the price at which the trade is actually executed. It often occurs in fast-moving markets or when trading low-liquidity assets.
  • Why it Matters: Slippage is a hidden cost of trading. A disciplined trader accounts for potential slippage in their risk management and entry/exit strategy to avoid unexpected losses.
• Long / Short: A “long” position is a trade where you buy an asset with the expectation that its price will rise. A “short” position is a trade where you sell an asset you don’t own with the expectation that its price will fall, intending to buy it back later at a lower price.
  • Why it Matters: These are the two fundamental directions of trading. As a prop trader, you are expected to be proficient at both, allowing you to profit in bull (rising) and bear (falling) markets.
• Bull Market / Bear Market: A bull market is a period of generally rising prices, while a bear market is a period of generally falling prices.
  • Why it Matters: Identifying the prevailing market sentiment (bullish or bearish) is crucial for developing a sound trading strategy. Trend-following strategies, for instance, are designed to capitalize on these broad market movements.

II. Risk Management Terms: The Language of Survival 🛡️

Risk management is the single most important skill for a prop trader, and this vocabulary is at the core of it.

• Stop-Loss: An order placed with a broker to automatically sell an asset once it reaches a certain price.
  • Why it Matters: The stop-loss is the first line of defense in risk management. It is a tool for predefined capital preservation, ensuring that a single losing trade does not turn into a catastrophic event. A professional trader’s stop-loss is always based on technical or fundamental analysis, not a random number.
• Take-Profit (TP): An order to automatically close a position once it reaches a certain price, locking in a profit.
  • Why it Matters: A take-profit order helps a trader remove emotion from the process of managing a winning trade. It enforces discipline by ensuring you exit a position at a predetermined target, preventing greed from causing you to hold on for too long.
• Risk-Reward Ratio (RR): The ratio of the potential loss a trader is willing to take on a trade (the risk) versus the potential gain they hope to achieve (the reward). For example, a 1:2 RR means a trader is risking $1 to potentially make $2.
  • Why it Matters: This ratio is a cornerstone of professional trading. A profitable system isn’t just about having more winners than losers; it’s about having a positive expectancy, which means your average winning trade is significantly larger than your average losing trade. A positive RR is a prerequisite for a sustainable trading career.
• Drawdown: The decline from a recent peak in an account’s value. It is usually measured as a percentage.
  • Why it Matters: Drawdown is the single best measure of risk over time. A prop firm will have strict rules about maximum drawdown, and a trader must manage their risk to stay within these limits to maintain their capital allocation.
• Position Sizing: The process of determining the number of units, lots, or shares to trade in a specific position, based on your risk tolerance and stop-loss distance.
  • Why it Matters: Position sizing is the most critical component of risk management. It ensures that you are risking a consistent, small percentage of your capital on every trade, no matter the volatility. A professional trader never uses a fixed lot size without first calculating their risk per trade.
• Daily Loss Limit: A maximum amount of capital a prop trader is allowed to lose in a single trading day before they are required to stop trading.
  • Why it Matters: This is a “circuit breaker” designed to protect a trader’s capital and psychology. Hitting this limit prevents emotional, or “revenge,” trading from spiraling out of control and turning a bad day into a catastrophic week.

III. Prop Firm & Career-Related Terms 🏛️

These terms are specific to the unique environment of a proprietary trading firm.

• Prop Trader: A proprietary trader is a professional who trades with the firm’s capital, not a client’s. They are compensated through a percentage of the profits they generate.
  • Why it Matters: Prop trading is a merit-based career. You are given capital to prove your skills, and your performance is a direct measure of your value to the firm.
• Firm Capital: The trading capital provided to a prop trader by the firm.
  • Why it Matters: This is the capital you are entrusted to manage. The ability to manage it prudently and grow it consistently is how a trader earns more capital and a higher payout percentage over time.
• House Rules: The specific trading rules, risk limits, and guidelines set by the proprietary trading firm.
  • Why it Matters: The house rules are non-negotiable. They are designed to protect the firm’s capital and ensure all traders are operating within a structured, disciplined framework. Violating them can lead to immediate termination.
• Payout: The percentage of profits a prop trader receives from their successful trades.
  • Why it Matters: Payouts are the core of a prop trader’s compensation. As a trader consistently demonstrates discipline and profitability, their payout percentage and capital allocation often increase.
• Scaling Up: The process of a prop firm increasing a trader’s capital allocation after they have demonstrated consistent profitability and disciplined risk management.
  • Why it Matters: Scaling up is the primary goal of any aspiring prop trader. It is the definitive sign of trust from the firm and the direct path to a significantly higher income.

IV. Technical & Strategy Terms 📈

These terms are a key part of the technical analysis language used to develop and execute trading strategies.

• Support & Resistance: Support is a price level where a downtrend is expected to pause due to a concentration of demand. Resistance is a price level where an uptrend is expected to pause due to a concentration of supply.
  • Why it Matters: These are fundamental concepts for technical traders. They serve as key levels for placing stop-losses, setting profit targets, and identifying high-probability entry points.
• Trend: The general direction in which a market or asset is moving. It can be an uptrend (bullish), a downtrend (bearish), or a sideways trend (ranging).
  • Why it Matters: “The trend is your friend” is a timeless trading adage. Many of the most popular strategies, such as trend-following, are built around identifying and trading in the direction of the prevailing trend.
• Moving Average (MA): A line on a chart that smooths out price data by creating a constantly updated average price.
  • Why it Matters: Moving averages are one of the most popular and versatile technical indicators. They are used to identify the direction of a trend, provide dynamic support and resistance levels, and generate buy or sell signals.
• Candlestick Chart: A type of financial chart used to describe price movements over a set period. Each “candlestick” represents the open, high, low, and close price for that period.
  • Why it Matters: Candlestick charts are a visual language that helps traders quickly read the story of a market’s price action, sentiment, and momentum. Patterns formed by candlesticks are a key component of many technical analysis strategies.

Final Thoughts 🌟

This glossary is your foundational guide to the language of prop trading. By committing these terms to memory and, more importantly, by understanding the concepts behind them, you will be well-equipped to begin your journey. A deep understanding of these terms is the first step toward building the discipline, the plan, and the psychological fortitude required to become a consistently profitable professional trader.