Prop Firm Glossary: 30 Terms Every Funded Trader Should Know

A prop firm glossary explains the words firms use in their rules: drawdown, daily loss limit, profit target, profit split, best day rule and more. One misread term, such as treating equity as balance, can end an account on a rule you thought you were inside.

Terms are grouped by letter. If the whole model is new to you, start with what a prop firm is.

Key takeaways

• Drawdown terms decide survival: daily loss limit, max drawdown, static and trailing are the rules that end accounts.
• Equity is not balance: many limits are measured on equity, which includes open trades.
• Some rules only delay you: the profit target and the best day rule slow a pass or a payout but do not end the account.
• Funded still means simulated: at OctoFunded, challenge and funded accounts use simulated capital.

Which prop trading terms matter most?

The terms that matter most are the ones tied to a loss limit, because breaking one ends the account. Here they are in dollars on an illustrative $100K simulated account, using OctoFunded percentages.

Worked example: balance vs equity. You start the day at $100,000 on the 1-Step. You close two losing trades for minus $2,000, so balance is $98,000. One trade is still open at minus $1,500, so equity is $96,500. If the daily limit counts open trades, you are $3,500 down and only $500 from the $4,000 limit, even though your balance says $2,000.

A to B

Balance

Your balance is the account value counting only closed trades. It changes when a position is closed, not while it is open.

Best day rule

A best day rule caps how much of your total profit can come from your single best trading day. At OctoFunded the cap is 50% of total profit on the 1-Step and 20% on Instant Funded. It does not end the account, but it can delay a pass or a payout. See the best day rule guide for the formula.

Breach

A breach is a broken hard rule, most often the daily loss limit or the max drawdown. A breach usually ends the challenge or funded account at once, even if the account is in profit overall. Most breaches trace back to sizing, as shown in why traders fail.

C

Challenge

A challenge is a paid evaluation where you reach a profit target while staying inside the loss limits. It can have one phase (1-Step) or two (2-Step). Passing gives you a funded account on simulated capital. Read more about the prop firm challenge.

Consistency rule

A consistency rule limits how uneven your results can be, for example by capping daily profit or lot size relative to your average. A best day rule is one common type; compare them in the consistency rule guide.

D

Daily loss limit

The daily loss limit is the most your account can lose in one trading day before it is breached. Firms differ on the reference point (start-of-day balance or equity) and on whether open trades count. OctoFunded uses 5% on the 2-Step, 4% on the 1-Step and 3% on Instant Funded. Details in the daily loss limit guide.

Drawdown

Drawdown is how far the account has fallen from a reference point, such as the starting balance or the highest value reached. In prop firm rules, the max drawdown is the loss limit that ends the account when equity reaches it. It comes in two main forms: static and trailing.

E

Equity

Equity is your balance plus or minus the profit or loss on open trades. It moves with the market while positions are open. When a rule is "equity-based", a floating loss counts against it before you close the trade.

Expert Advisor (EA)

An Expert Advisor is an automated trading program that places and manages orders for you. Some firms ban them; OctoFunded allows EAs under the same loss limits as manual trading. Before you run one, read prop firms that allow EAs.

F

Fee refund

A fee refund returns the challenge fee to the trader, usually with the first payout. At OctoFunded, the 1-Step and 2-Step fees come back with the first payout, and Instant Funded has no fee refund. More in the fee refund guide.

Floating P&L

Floating profit and loss is the unrealized result of open trades. Floating losses are a common hidden cause of daily limit breaches.

Funded account

A funded account is the account you trade after passing a challenge, or from day one with instant funding. At OctoFunded it runs on simulated capital, and payouts are calculated from simulated profit under the program rules. See funded trading account.

I

Instant funding

Instant funding gives you a funded account with no evaluation phase. OctoFunded's Instant Funded uses a 3% daily loss limit and a 6% trailing max loss. Read instant funding for the trade-offs.

M

Max loss (max drawdown)

The max loss is the floor your equity can never touch. On $100K, a 10% max loss puts the floor at $90,000 if it is static.

Minimum trading days

Minimum trading days are the number of separate days you must trade before a phase can be passed or a payout requested. Not every firm uses them, and the count varies by program. Check the OctoFunded program rules for the current terms.

N

News trading rule

A news trading rule restricts opening or closing trades around high-impact economic releases. Some firms ban it, some allow it, and some restrict only the minutes around the release.

Numbers: 1-Step and 2-Step

1-Step

A 1-Step is a challenge with a single phase. At OctoFunded it has a 10% target, a 4% daily loss limit, an 8% trailing max loss and a best day cap of 50% of total profit. Full breakdown in the 1-Step challenge guide.

2-Step

A 2-Step is a challenge with two phases, each with its own target. At OctoFunded the targets are 10% then 5%, with a 5% daily loss limit and a 10% static max loss. See the 2-Step challenge guide.

P

Payout

A payout is a payment to the trader based on simulated profit on a funded account, approved under the program rules. It is a reward under a contract, not money taken out of a personal trading account. You request it; you do not cash out a balance.

Payout cycle

The payout cycle is how often you can request a payout. At OctoFunded the cycle is 14 days, subject to the program rules. Payouts are sent in USDT or USDC.

Profit split

The profit split is the share of simulated profit paid to you. At OctoFunded it is 80% from the first payout, subject to the program rules. On $4,000 of simulated profit, an 80% split is $3,200 (illustrative arithmetic, not a forecast).

Profit target

The profit target is the gain you must reach to pass a challenge phase, written as a percentage of the starting balance. On $100K, a 10% target is $10,000. It is the one rule you can miss today and still try again tomorrow.

Prop firm

A proprietary trading firm, or prop firm, gives traders access to an account under fixed risk rules in exchange for a fee, and shares profit through payouts. Most online prop firms run accounts on simulated capital. Start with what a prop firm is.

R

Reward-to-risk ratio (R)

Reward-to-risk compares what a winning trade makes with what a losing trade costs. "2R" means the win is twice the planned loss.

Risk per trade

Risk per trade is the amount you lose if your stop is hit, often written as a percentage of the account. At 0.5% on $100K, that is $500, so 10 full losses fit inside a $5,000 daily limit. Build it into a risk plan.

S

Simulated capital

Simulated capital is the notional balance a prop firm assigns to your account. Trades run in live market conditions, but no client money is placed on the market for you. OctoFunded challenges and funded accounts use simulated capital only.

Static drawdown

A static drawdown keeps the floor at a fixed level from the starting balance. Profit widens your buffer because the floor never moves. The OctoFunded 2-Step uses a 10% static max loss; compare both types in static vs trailing drawdown.

T

Time limit

A time limit is a deadline for passing a challenge phase. Deadlines can push traders to raise size near the end. OctoFunded has no time limit on any program.

Trailing drawdown

A trailing drawdown moves the floor up as the account makes new highs, so profit does not add much room. Firms differ on whether it tracks balance or equity, when it updates and whether it stops moving. OctoFunded uses trailing drawdown on the 1-Step (8%) and Instant Funded (6%). See trailing drawdown explained.

Transaction hash

A transaction hash is the public ID of a blockchain transfer. You can paste it into a block explorer to see the amount, the time and the receiving address. OctoFunded payouts are on-chain with a public transaction hash; learn to verify a payout hash or read about on-chain payouts.

FAQ

What does drawdown mean in a prop firm?

Drawdown is how far your account has fallen from a reference point, usually the starting balance or the highest balance reached. In a prop firm, the max drawdown is the loss limit that ends the account when equity reaches it.

What is the difference between balance and equity?

Balance only counts closed trades. Equity is balance plus or minus the profit or loss on open trades, so it moves with the market while positions are open.

What does breach mean in prop trading?

A breach is a broken hard rule, such as the daily loss limit or the max drawdown. A breach usually ends the challenge or the funded account at once.

What is a profit split?

A profit split is the share of simulated profit paid to the trader when a payout is approved. At OctoFunded it is 80% from the first payout, subject to the program rules.

Is a funded account the same as a live trading account?

Not at most online prop firms. At OctoFunded, funded accounts run on simulated capital, and payouts are calculated from simulated profit under the program rules.

Put the terms to work

Once the words are clear, compare the rules side by side in dollars for your own size. OctoFunded runs the 2-Step, 1-Step and Instant Funded on simulated capital, with a one-time fee, no time limit and EAs allowed. For the full rule set, read prop firm rules explained.

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