Prop firm trading terms, explained.
Plain-English definitions, with cross-links to the articles where each term is used in practice.
Drawdown
In prop-firm trading, drawdown is the decrease in account equity from its peak. Daily drawdown resets each day; max (overall) drawdown does not. FTMO Challenges typically allow 5% daily drawdown and 10% max drawdown — breaching either ends the account.
Position Sizing
Position sizing is the calculation that determines how many lots (or units) to trade based on account size, stop-loss distance, and per-trade risk percentage. The fixed-fractional formula is: Lots = (Account × Risk%) / (Stop-pips × Pip-value-per-lot). Without a sizing formula, prop-firm challenges fail through oversized positions.
Daily Loss Limit
The daily loss limit is the maximum amount your prop-firm account can fall during a single trading day before the challenge fails. FTMO sets it at 5% of the previous day's reference balance, checked tick-by-tick on floating equity. Most other prop firms use similar limits (4-5%).
Profit Target
The profit target is the percentage gain a trader must achieve to pass a prop-firm challenge phase. FTMO Challenge requires 8% profit, Verification requires 5%. Most other firms use 8-10% on Phase 1 and 4-5% on Phase 2. Hitting the target before breaching daily-loss or max-drawdown moves you to the next stage.
Stop-Out
A stop-out is the automatic closure of a trader's positions by the broker when account margin falls below a required level. On FTMO and most prop firms, hitting the daily-loss-limit or max-drawdown triggers an automatic stop-out and the challenge ends. Stop-out is enforced at the platform level — there is no second chance once it triggers.
Scaling Plan
A scaling plan is the prop-firm program that increases a funded trader's account size over time based on consistent performance. FTMO's plan grows the account by 25% every four months for traders meeting profit and consistency criteria. Scaling is what turns a $100K funded account into a $200K+ account without paying for a new challenge.
Expectancy
Expectancy is the average profit (or loss) a trading strategy produces per trade, expressed in dollars or R-multiples. The formula: Expectancy = (Win-rate × Average winner) − (Loss-rate × Average loser). A strategy with positive expectancy will produce profits over a large enough sample, regardless of any individual trade's outcome.
R-Multiple
An R-multiple is a unit of risk used to standardize trade outcomes. 1R equals the dollar amount you risked on the trade — typically 1% of the account. A 2R winner means a profit of twice the risk amount. R-multiples make trade outcomes comparable across position sizes and account sizes by normalizing them to risk-units.
Verification (FTMO Stage 2)
Verification is the second stage of the FTMO evaluation process. After passing the Challenge (Stage 1), traders enter Verification, which has a lower profit target (5%) but the same drawdown rules. Passing Verification grants access to a funded FTMO Account that pays real rewards.