Prop Firm & SMC Trading Glossary
Understand the terminology of professional, systematic traders. Clear definitions of structure shift points, imbalances, and risk calculations.
Backtesting
The process of testing a trading strategy against historical price data to estimate how it would have performed in the past, used to validate an edge before risking real capital.
Balance Drawdown
A drawdown calculation method that only accounts for closed trades, ignoring unrealized floating profits or losses.
Break of Structure (BOS)
The decisive continuation of a market trend, confirmed when the price breaks and closes a candle body beyond the previous major swing high (in an uptrend) or swing low (in a downtrend).
Breakout
A price movement through a defined support or resistance level (such as a consolidation range or trendline), typically accompanied by increased volume and volatility.
Capital Preservation
The defensive philosophy and strict mathematical framework focused entirely on preventing the loss of the trading account baseline before attempting to generate returns.
Challenge Phase
The Challenge Phase is the first and most difficult step of a standard two-step prop firm evaluation. It typically requires hitting a higher profit target (8-10%) under strict drawdown constraints.
Change of Character (CHOCH)
The first decisive break of major market structure in the opposite direction of the prevailing trend, signaling that institutions have shifted their order flow and a major reversal is likely.
Consistency Rule
A Consistency Rule is a parameter enforced by proprietary trading firms to ensure that a trader’s profits are generated through a repeatable strategy rather than luck, gambling, or a single massive trade.
Consolidation
A period where the market moves sideways within a defined range, indicating a balance between buyers and sellers and a pause in the overall trend as institutions accumulate or distribute positions.
Correlation Risk
The risk that multiple open trading positions move in the same direction simultaneously due to shared underlying market drivers, effectively increasing your aggregate exposure beyond individual trade limits.
Daily Loss Limit
The maximum amount a trader is allowed to lose in a single trading day on a prop firm account, measured from the day’s starting balance or equity. Breaching it terminates the evaluation or funded account immediately.
Double Bottom
A bullish reversal market structure pattern where price drops to a low, pulls back up, and then returns to reject that exact same low, forming a 'W' shape on the chart.
Double Top
A bearish reversal market structure pattern where price reaches a high, pulls back, and then returns to reject that exact same high, forming an 'M' shape on the chart.
Drawdown
The percentage or absolute dollar decline of a trading account's peak value to its lowest subsequent point before recovery.
Emotional Trading
The act of making financial market decisions based on physiological feelings (fear, anger, greed, hope) rather than objective data, technical analysis, and mechanical rules.
Equity Drawdown
A strict drawdown calculation method that includes real-time open floating profits and losses.
Evaluation Phase
The Evaluation Phase is the testing period required by a proprietary trading firm to assess a trader’s profitability and risk management skills before granting access to a funded account.
Expert Advisor (EA)
An automated trading program, most commonly on MetaTrader platforms, that executes trades according to pre-programmed rules without manual intervention — and a category heavily restricted by most prop firms.
Exposure
The total amount of capital at risk across all open positions in the market at any given time.
Fair Value Gap (FVG)
A three-candle pattern representing a market imbalance where the middle candle moves rapidly, leaving a gap between the wicks of the preceding and succeeding candles.
Fear
The paralyzing emotional state that prevents a trader from executing a valid setup or causes them to prematurely close a winning trade to secure a minor profit.
Floating Drawdown
The unrealized loss on open positions, measured in real time before the trade is closed. On equity-based prop firm accounts, floating drawdown counts toward your daily and maximum loss limits the instant a position moves against you.
Floating Loss
The current, unrealized loss of open positions that have not yet been closed.
FOMO
Fear Of Missing Out. The intense psychological anxiety that a massive market move is happening without you, causing you to recklessly chase a trade late at terrible prices.
FTMO
FTMO is one of the oldest and most established proprietary trading firms in the retail industry. It provides traders who pass a strict two-step evaluation process with access to simulated capital and a high profit split.
Funded Account
A Funded Account is a simulated live trading account provided by a proprietary firm to a trader who has successfully passed their evaluation process, allowing the trader to earn a profit split on generated returns.
FundedNext
FundedNext is a modern proprietary trading firm known for offering traders a 15% profit share even during the evaluation phases, differentiating it from traditional prop firm models.
Greed
The intense, emotional desire for excessive profit that causes a trader to abandon mechanical risk rules, ignore take-profit targets, and overleverage their account.
High-Water Mark
The highest peak value (balance or equity) that a trading account has ever reached. Used to calculate trailing drawdowns.
Higher High
A structural swing point where the peak price of an upward impulse wave is noticeably higher than the peak of the immediately preceding impulse wave. It is the defining characteristic of an uptrend.
Inducement
A psychological trap engineered by market algorithms, creating obvious but false technical setups (like trendlines or double tops) to induce retail traders to enter early and provide liquidity.
Judas Swing
A deliberate false price move at the start of a trading session that runs against the day’s true direction, engineered to trigger stop losses and lure breakout traders into the wrong side before the market reverses.
Leverage
Borrowed capital provided by a broker that allows a trader to control a large position size with a relatively small amount of personal margin.
Liquidity
The accumulated volume of resting buy and sell orders (stop losses and limits) present at specific price levels in the market. Liquidity is the fuel that moves price.
Liquidity Sweep
A sudden, aggressive price movement that pierces a major support or resistance level to trigger resting stop losses, followed immediately by a sharp reversal.
Lot Size
The standardized volume unit used to measure the quantity or amount of an asset being traded. In forex, it dictates the exact monetary value of each pip movement.
Lower Low
A structural swing point where the bottom price of a downward impulse wave is noticeably lower than the bottom of the immediately preceding downward wave. It is the defining characteristic of a downtrend.
Margin
The exact amount of capital required by a broker as a good-faith deposit to open and maintain a leveraged position in the market.
Market Structure
The overall framework of how price action moves and behaves over time, characterized by the continuous sequence of swing highs and swing lows that define trends and ranges.
Maximum Drawdown
The absolute limit your account equity is permitted to drop from the starting balance before the prop firm terminates your evaluation.
Maximum Risk
The absolute, non-negotiable ceiling on total accumulated risk across all open positions, preventing total account ruin during extreme market volatility or correlated failures.
Midnight Open
The opening price of the trading day at 00:00 New York time, used by institutional traders as the primary daily bias anchor — price trading above it suggests bullish intent for the day, while price below it suggests bearish intent.
Mitigation Block
A failed Order Block (or a broken structural level) that price returns to later, allowing institutions to close out original losing positions before the market continues in the new trend direction.
Order Block
The last opposing candle (or series of candles) before a massive institutional impulse move that breaks structure, leaving behind an imbalance in price.
Overtrading
The destructive habit of executing an excessive number of trades that do not fit a proven strategy, usually driven by boredom, impatience, or an addiction to market action.
Pip
Percentage in Point. The smallest standardized price movement in the forex market, typically representing the fourth decimal place in a currency quote.
Position Sizing
The mathematical process of determining how many units, shares, or lots to trade based on account size, entry price, and stop loss distance to maintain a strict predetermined risk amount.
Premium & Discount
A pricing model used by institutions to determine if an asset is overvalued (Premium) or undervalued (Discount) relative to its current trading range, usually measured using a 50% Fibonacci equilibrium line.
Profit Target
A Profit Target is the predetermined percentage of account growth a trader must achieve to successfully pass a proprietary trading firm evaluation phase.
Pullback
A temporary reversal in price direction that occurs within a larger prevailing trend. A pullback represents a brief period of profit-taking or minor counter-trend momentum before the primary trend resumes.
Retest
A price movement where the market returns to touch and confirm a previously broken technical level (like a trendline or resistance zone) before continuing in the breakout direction.
Revenge Trading
An emotional, impulsive reaction to a losing trade where a trader immediately enters the market again, usually with larger size, to aggressively win back the lost money.
Reward Split
The percentage of generated profits that a funded trader is entitled to withdraw.
Risk Guideline
A recommended or enforced limit on the amount of capital exposed per trade or overall.
Risk Per Trade
The exact, predetermined percentage or fixed dollar amount of total trading capital that a trader is willing to lose on a single position if the stop loss is triggered.
Risk to Reward Ratio
A ratio comparing the potential profit of a trade (reward) to the potential loss (risk). A 1:3 ratio means the trader is risking $1 to potentially make $3.
Slippage
The difference between the expected price of a trade and the actual price at which the trade is executed by the broker.
Spread
The difference between the Bid (sell) price and the Ask (buy) price of an asset. It represents the immediate cost of executing a trade paid to the broker.
Static Drawdown
A maximum loss limit in prop firm trading that is fixed from the initial account balance and never trails your profits.
Stop Loss
A pre-programmed mechanical order placed with a broker to automatically close a losing position once it reaches a specific, non-negotiable price level, cutting losses instantly.
Striking System
A penalty-based risk framework used by FundingPips to discipline traders who exceed floating loss limits on a single trade idea.
Support and Resistance
Horizontal price levels where the market has historically experienced a high concentration of buying pressure (support) or selling pressure (resistance), causing price to bounce or reverse.
Take Profit
A pre-programmed mechanical order placed with a broker to automatically close a winning position and secure gains once the market reaches a specific, predetermined price level.
The5ers
The5ers is a proprietary trading firm that specializes in immediate funding and rapid scaling plans, allowing traders to manage real capital from day one.
Trade Idea
A collective grouping of all active positions on a single instrument moving in the same direction.
Trading Discipline
The unyielding ability to flawlessly execute a mechanical trading plan, adhere to strict risk management rules, and control emotional impulses regardless of market conditions.
Trading Journal
A detailed, uncompromising daily record of every trade taken, including entry/exit metrics, chart screenshots, and the physiological/emotional state of the trader during execution.
Trailing Drawdown
A maximum loss limit that moves up as your account equity reaches new high-water marks, preventing you from building a safety buffer.
Trend
The overall directional bias of a financial market over a specific period of time. A trend is visually confirmed by a series of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend).
Trendline
A diagonal line drawn on a chart connecting a series of higher lows (in an uptrend) or lower highs (in a downtrend) to visually represent the current market direction.
Verification Phase
The Verification Phase is the second step of a standard prop firm evaluation, featuring a lower profit target to confirm the trader’s consistency before granting a funded account.