Prop Trading
Terminology

Trading financial assets using a firm's capital rather than your personal funds. 
Since prop traders trade with the firm's money instead of their own, they must adhere to strict rules regarding risk limits, drawdowns, and position sizing. 
In return, successful traders often receive a share of the profits, making prop trading a high-reward but also high-pressure career.

Also known as ‘demo trading’, simulated trading involves trading in a virtual environment that mirrors the live markets. Simulated trading does not use real money to trade. Instead, traders use virtual funds.

A trader who has passed a prop firm's evaluation and is eligible for profit share. Plus Markets’ funded traders, also known as ‘Plus Traders’, can keep 90% of the profits that they make.

A test period where traders must meet specific profit targets and risk limits before becoming a Plus Trader.

During this phase, traders must meet specific profit targets within a set timeframe while adhering to strict drawdown limits. The evaluation criteria typically include maintaining a positive risk-reward ratio, avoiding excessive losses, and demonstrating consistent performance across multiple trades. 

Traders must also follow predefined rules regarding leverage, position sizing, and trading days to prove they can manage capital responsibly.

A paid-for trading period during which traders must hit a specified profit target to prove their skills and become a Plus Trader. 

This challenge serves as a gateway to becoming a funded Plus Trader, allowing traders to showcase their skills, discipline, and risk management strategies in a real-market environment.

During the challenge, traders must meet a specific profit target within a given time frame while adhering to strict drawdown and risk limits. 

For example, a trader might be required to achieve a 10% profit on a $50,000 evaluation account without exceeding a 5% maximum drawdown. The challenge ensures that traders can not only generate profits but also manage risk effectively.

The percentage of profits a funded trader keeps if they manage to place profitable trades within the prop-firm’s guidelines. This structure enables traders to scale their earnings without risking their own funds.

For example, if a prop firm offers an 80/20 profit split, the trader keeps 80% of the profits while the firm takes 20%. Suppose a funded trader makes $10,000 in profit in a given month- under this split, they would take home $8,000, while the firm retains $2,000.

A payout in prop trading refers to the process of withdrawing earned profits from a funded trading account.

Once a trader has successfully met the profit targets and complied with the firm’s risk management rules, they become eligible to receive a portion of their earnings based on the agreed-upon profit split.

Prop firms typically have different payout structures, including weekly, bi-weekly, or monthly withdrawals. Some firms also offer instant payouts, allowing traders to access their profits as soon as they reach the minimum withdrawal threshold.

For example, if a trader has an 80/20 profit split and earns $5,000 in profit, they would be entitled to withdraw $4,000, while the remaining $1,000 goes to the firm. H2: Risk Management & Trading Rules

The daily loss limit is the maximum amount a trader can lose in a single trading day before violating the prop firm’s rules and potentially losing access to their funded account. This rule is designed to protect traders from excessive losses and ensure they maintain responsible risk management.

Prop firms set daily loss limits based on a percentage of the trader’s account balance or initial capital.

For example, if a firm enforces a 5% daily loss limit on a $100,000 account, the trader cannot lose more than $5,000 in a single trading day. If they hit this threshold, they may face restrictions such as temporary suspension or full disqualification, depending on the firm's policies.

The maximum drawdown (max drawdown) is the total amount a trader is allowed to lose from their highest account balance before violating the prop firm’s rules.

Prop firms typically set max drawdown limits as either a fixed amount (e.g., $10,000 on a $100,000 account) or a trailing percentage (e.g., 10% of the highest balance).

For example, if a trader starts with a $100,000 account and the max drawdown is 10%, they cannot let their balance drop below $90,000 at any point. If they grow their account to $110,000, their new max drawdown limit may adjust to $99,000 (depending on whether the firm uses a static or trailing drawdown rule).

Exceeding the max drawdown limit results in an automatic breach, which could lead to disqualification from the Plus Markets trading program.

The Risk-to-Reward Ratio (RRR) is a key metric in trading that compares the potential profit of a trade to its potential loss. It helps traders evaluate whether a trade is worth taking by assessing the balance between risk and reward.

The ratio is calculated by dividing the expected profit by the potential loss. 

For example, if a trader risks $100 to potentially make $300, the risk-to-reward ratio is 1:3 (risking 1 unit to gain 3 units). A common guideline among traders is to aim for an RRR of at least 1:2 or higher, meaning the potential reward should be at least twice the amount risked.

A stop loss order is a preset order that automatically closes a trade to limit losses. When the price hit’s a specified target, the trade will automatically close. 

This order is essential in trading as it prevents traders from holding onto losing positions for too long, which can lead to significant drawdowns.

For example, if a trader buys a stock at $100 and sets a stop-loss at $95, the trade will automatically close if the price drops to $95, preventing further losses. 

Stop-loss orders can be fixed (set at a specific price) or trailing (adjusting as the price moves in favor of the trade to lock in profits).

A take-profit order is a predefined instruction that automatically closes a trade once the price reaches a specified profit level. This order is used to lock in gains without requiring the trader to monitor the market constantly. 

By setting a take-profit level, traders can exit at their desired price point, avoiding the temptation to hold onto a trade for too long and risk losing profits due to market reversals.

For example, if a trader buys a stock at $100 and sets a take-profit order at $110, the trade will automatically close once the price reaches $110, securing the profit without manual intervention. 

Take-profit orders are particularly useful in high-volatility markets, where price swings can be sudden and unpredictable.

Leverage in trading is the use of borrowed capital to increase the size of a trade beyond the size of your trading account. It allows traders to control larger positions, potentially amplifying both gains and losses.

For example, let's say you have $1,000 in your trading account, and your broker offers 10:1 leverage. This means you can control a $10,000 position with just your $1,000. If the market moves in your favor by 1%, your position would increase by $100 (1% of $10,000), giving you a profit of 10% on your initial $1,000 investment.

Margin refers to the minimum amount of capital a trader needs to deposit in order to open and maintain a leveraged position in the market.

Essentially, it acts as a "good faith" deposit, allowing traders to control larger positions than they could with their available funds alone.

When you use leverage, the broker lends you the additional capital to open a larger position, but the margin is the portion you must put up as your own stake in the trade.

The highest price a buyer is willing to pay for an asset. It represents the demand side of the market and indicates the maximum amount a buyer is prepared to spend to purchase the asset. 

When you want to sell an asset, the bid price is the price you can potentially sell it for, but keep in mind that the actual transaction will only occur if the seller agrees to this price. 

The bid price often fluctuates based on market conditions, supply and demand, and investor sentiment.

The ask price, also known as the offer price, is the lowest price a seller is willing to accept for an asset, such as a stock, bond, or currency, at a given moment in time. 

It represents the supply side of the market, showing the price at which a seller is ready to part with the asset. When you're looking to buy an asset, the ask price is the price you will pay, provided you're able to agree with the seller.

The difference between the bid and ask price, representing transaction costs. A tight spread (small difference) usually indicates high liquidity and low trading costs, while a wide spread suggests lower liquidity and higher costs.

A type of trade order that is executed immediately at the best available price in the market. When you place a market order, you're instructing your broker to buy or sell an asset as quickly as possible, at the current market price

This type of order guarantees execution, but it doesn't guarantee a specific price- especially in volatile markets, the final execution price may be slightly higher or lower than expected.

A limit order is an order placed to buy or sell an asset at a specific price or better. This means that you set the maximum price you're willing to pay when buying, or the minimum price you're willing to accept when selling, and the order will only be executed if the market reaches that price or a better one. 

Unlike market orders, limit orders are not executed immediately and may remain open until the asset hits the specified price or until you cancel the order. 

For example, if you want to buy a stock but only want to pay $50 per share, you would place a limit order at $50. If the stock's price reaches or falls below that value, your order will be filled, but if the price does not reach your limit, the order will not be executed.

A stop order is a type of trade order that becomes a market order once the asset reaches a specified price, known as the stop price.

When the asset price hits or surpasses the stop price, the stop order is activated and automatically becomes a market order, meaning it will be executed at the next available price in the market. Stop orders are commonly used for two primary purposes: to limit losses or to lock in profits. 

For example, if you own a stock and want to limit your potential loss, you could place a stop order at a price below the current market value. If the stock price drops to or below your stop price, the order is triggered, and your position will be sold to prevent further losses.

The difference between the expected and actual execution price of a trade. Large slippage can make it challenging to execute trades at a specified price. 

Slippage occurs when there is a difference between the expected price of a trade and the actual price at which it is executed. 

This typically happens in fast-moving or highly volatile markets, where price fluctuations occur rapidly, making it difficult to execute trades at the intended price.