The Prop Trader's Dictionary

Account size refers to the total amount of capital available in a trading account. It determines how much a trader can risk per trade, the position sizes they can take, and their overall exposure to the market. In both personal and funded trading, account size plays a key role in shaping risk management and trading strategy decisions.

Average True Range (ATR) is a technical indicator that measures market volatility by calculating the average range between high and low prices over a specific period. It does not indicate direction but shows how much an asset typically moves. Traders use ATR to understand current market conditions and adjust their risk management accordingly.

Arbitrage is the practice of simultaneously buying and selling the same asset across different markets to profit from price discrepancies. It relies on the fact that the same asset can be priced differently in different exchanges or regions at the same time. Arbitrage opportunities are typically short-lived, as markets tend to correct themselves quickly.

Backtesting is the process of testing a trading strategy using historical market data to evaluate how it would have performed in the past. It helps traders assess the effectiveness of a strategy before applying it in live trading. By analyzing past results, traders can identify strengths, weaknesses, and potential risks within their approach.

Breakout trading is a strategy where traders enter a trade when the price moves beyond a defined support or resistance level. The idea is that once price “breaks out” of a range, it can continue moving strongly in that direction. Breakout trading is commonly used to capture momentum in trending markets.

A bond is a fixed-income financial instrument that represents a loan made by an investor to a borrower, typically a government or corporation. In exchange for the loan, the borrower agrees to pay periodic interest and return the principal at a set maturity date. Bonds are commonly used as lower-risk investments compared to stocks.

A Contract for Difference (CFD) is a financial derivative that allows traders to speculate on the price movement of an asset without owning the underlying asset. Instead of buying or selling the asset itself, traders enter a contract with a broker to exchange the difference in price between the opening and closing of a trade. CFDs are commonly used in markets like forex, indices, commodities, and crypto.

Contract size refers to the standardized quantity of an asset represented by a single trading contract. It determines how much of an asset you are controlling in one trade and directly impacts profit, loss, and overall exposure. Contract size varies depending on the market—for example, in forex, a standard lot typically represents 100,000 units of a currency.

A candlestick is a type of price chart that displays the open, high, low, and close prices of an asset within a specific time period. Each candlestick consists of a body and wicks, showing both the price range and directional movement during that period. Candlestick patterns are widely used by traders to identify potential market reversals or continuations.

Daily drawdown refers to the maximum amount a trading account is allowed to lose within a single trading day. It is typically expressed as a percentage or fixed amount based on the account size. This limit is used to control risk and prevent excessive losses in a short period of time, especially in structured environments like prop trading.

Day trading is a trading style where positions are opened and closed within the same trading day, with no trades held overnight. It requires active monitoring of the markets, quick decision-making, and a disciplined approach to risk management. Day traders aim to profit from short-term price movements in stocks, forex, futures, or CFDs.

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a company's or an individual's ability to cover their debt obligations using their operating income. A DSCR above 1.0 indicates that there is sufficient income to service the debt, while a ratio below 1.0 suggests potential difficulty in meeting repayment obligations. It is commonly used by lenders and investors to assess financial health.

Earnings Per Share (EPS) is a financial metric that indicates how much profit a company generates for each outstanding share of its stock. It is calculated by dividing a company's net profit by its total number of shares. EPS is one of the most widely used indicators of a company's profitability and is closely watched by investors.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is a measure of a company's core operational profitability, stripping out non-operating expenses to give a clearer picture of business performance. EBITDA is widely used in financial analysis and company valuations.

In financial markets, equity refers to ownership in a company, typically represented by shares of stock. It also refers to the value of an asset minus any liabilities associated with it. In a trading context, equity commonly describes the current value of a trader's account after accounting for open positions.

A funded trader is a trader who is given access to capital by a proprietary (prop) trading firm after demonstrating consistent performance and risk management. Instead of trading their own money, the trader operates a funded account and earns a percentage of the profits generated. Funded traders must follow strict rules set by the firm to maintain access to the capital.

FAANG is an acronym referring to five major technology companies: Meta (formerly Facebook), Apple, Amazon, Netflix, and Google (Alphabet). These companies are known for their dominant market positions, large market capitalisations, and significant influence on broader stock market indices. Traders and investors closely follow FAANG stocks due to their high liquidity and market-moving potential.

Futures trading involves buying or selling contracts that obligate the trader to purchase or sell an asset at a predetermined price on a specified future date. Futures are standardised contracts traded on exchanges and are available for a wide range of assets, including commodities, currencies, indices, and interest rates. They are commonly used for both speculation and hedging.

Gross margin is a financial metric that shows the percentage of revenue a company retains after deducting the direct costs of producing its goods or services. It is calculated by dividing gross profit by total revenue and expressing it as a percentage. A higher gross margin indicates greater efficiency and pricing power.

Gross profit is the amount of money a company earns after subtracting the direct costs associated with producing its products or services, but before deducting operating expenses, taxes, and interest. It is one of the first indicators of a company's financial performance reviewed on an income statement. Gross profit helps investors understand how efficiently a company produces and sells its offerings.

Growth rate is a measure of how much a particular variable, such as revenue, earnings, or an asset's price, has increased or decreased over a specified period. It is typically expressed as a percentage and is used to evaluate performance and forecast future trends. In trading and investing, growth rates are applied to both individual companies and broader economic indicators.

Hedging is a risk management strategy used by traders and investors to offset potential losses in one position by taking an opposing position in a related asset. It acts as a form of insurance, reducing exposure to adverse price movements. While hedging can limit downside risk, it may also cap potential profits.

The head and shoulders pattern is a technical analysis formation that signals a potential reversal from an uptrend to a downtrend. It consists of three peaks — a higher central peak (the head) flanked by two lower peaks (the shoulders) — with a neckline connecting the lows between the peaks. A confirmed break below the neckline typically signals the beginning of a bearish move.

Implied volatility (IV) is a forward-looking metric derived from options prices that reflects the market's expectation of how much an asset's price will move over a given period. Unlike historical volatility, which looks at past price movements, implied volatility represents the market's consensus on future uncertainty. Higher implied volatility generally indicates greater expected price swings.

The Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of an investment. It represents the discount rate at which the net present value of all future cash flows from an investment equals zero. A higher IRR indicates a more attractive investment opportunity.

The inverse head and shoulders is a technical chart pattern that signals a potential reversal from a downtrend to an uptrend. It is the mirror image of the standard head and shoulders pattern, featuring three troughs — a lower central trough (the head) flanked by two higher troughs (the shoulders) — with a neckline connecting the highs between the troughs. A confirmed break above the neckline is typically viewed as a bullish signal.

A joint brokerage account is a financial account shared between two or more individuals, allowing all parties to contribute funds, place trades, and access the account. It is commonly used by partners, spouses, or business associates who wish to invest or trade together. All account holders typically share equal rights and responsibilities over the account.

A joint stock company is a business entity in which ownership is divided into shares that can be bought and sold by investors. Shareholders have limited liability, meaning their financial exposure is limited to the amount they invested. Most publicly traded companies on stock exchanges operate as joint stock companies.

A joint venture strategy is a business arrangement in which two or more parties agree to pool resources, expertise, or capital to pursue a specific project or business goal. Each party retains its own independent identity while sharing the risks, costs, and rewards of the venture. Joint ventures are commonly used in industries requiring significant upfront investment or specialised knowledge.

Key rate duration is a measure of a bond or fixed-income portfolio's sensitivity to changes in interest rates at specific points along the yield curve, rather than treating all rate changes as uniform. It helps investors understand how a portfolio will respond to non-parallel shifts in the yield curve. Portfolio managers use key rate duration to fine-tune interest rate risk.

In a business context, a kickback refers to an unethical or illegal payment made to someone in exchange for facilitating a deal, referral, or contract. Kickbacks are a form of corruption that distort fair market competition and are prohibited under many financial regulations. They can take the form of cash, gifts, or other benefits.

The Kondratieff Cycle, also known as the K-Wave, is a long-term economic theory suggesting that capitalist economies experience recurring cycles of expansion and contraction lasting approximately 40 to 60 years. Named after Russian economist Nikolai Kondratieff, these cycles are driven by major technological innovations and shifts in capital investment. Each cycle is characterised by phases of boom, stagnation, and decline.

The leverage ratio measures the extent to which a trader or financial institution is using borrowed capital relative to their own equity. In trading, it indicates how much market exposure a trader has relative to their actual capital. Higher leverage amplifies both potential profits and potential losses.

A limit order is an instruction to buy or sell an asset at a specified price or better. Unlike a market order, which executes immediately at the current price, a limit order will only be filled when the market reaches the desired price level. Limit orders give traders more control over their entry and exit prices.

Liquidity risk is the risk that a trader or investor may not be able to buy or sell an asset quickly enough at a fair price due to insufficient market activity. In illiquid markets, wide bid-ask spreads and low trading volume can result in significant slippage or difficulty exiting positions. Liquidity risk is particularly relevant during times of market stress or when trading less popular instruments.

Max drawdown (maximum drawdown) refers to the largest decline in a trading account’s balance from its peak to its lowest point over a period of time. It is usually expressed as a percentage or fixed amount and is a key measure of risk. Max drawdown helps traders understand how much they could potentially lose before recovering

Margin trading is the practice of using borrowed funds from a broker to trade financial assets, allowing traders to open positions larger than their available capital. The trader deposits a margin — a fraction of the full position value — as collateral. While margin trading can amplify profits, it equally amplifies losses and carries the risk of a margin call.

MIRR, or Modified Internal Rate of Return, is a financial metric that improves on the traditional IRR by addressing its limitations, particularly the assumption that cash flows are reinvested at the same rate as the IRR itself. MIRR assumes that positive cash flows are reinvested at the firm's cost of capital and that initial outlays are financed at the financing cost. It provides a more realistic measure of an investment's profitability.

Net debt is a financial metric that represents a company's total debt minus its cash and cash equivalents. It provides a clearer picture of a company's financial obligations by showing how much debt would remain if all available cash were used to pay it down. A negative net debt, sometimes called net cash, indicates a company has more cash than debt.

Net Operating Income (NOI) is a measure of a company's or property's profitability from its core operations, calculated by subtracting operating expenses from total revenue, excluding taxes and interest payments. It is widely used in real estate and corporate finance to evaluate the income-generating potential of an asset. NOI gives a clear view of operational performance before the effects of financing are considered.

Net Present Value (NPV) is a financial metric that calculates the difference between the present value of future cash inflows and the present value of future cash outflows over a set period. It accounts for the time value of money, recognising that a dollar received in the future is worth less than a dollar received today. A positive NPV indicates a potentially profitable investment.

Offset net worth refers to the practice of using assets or gains in one area to balance or reduce liabilities and losses in another, effectively neutralising a portion of the financial exposure. It is a concept used in personal finance, corporate balance sheets, and portfolio management. The goal is to present a more balanced picture of overall financial health.

Opportunity cost is the potential benefit or value that is foregone when choosing one option over another. In trading and investing, it represents the return that could have been earned by allocating capital to an alternative strategy or asset. Recognising opportunity cost is essential for making efficient capital allocation decisions.

Options trading involves buying or selling contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price before or on a certain expiry date. Call options give the right to buy, while put options give the right to sell. Options are used for speculation, income generation, and hedging purposes.

Position sizing refers to how much capital a trader allocates to a single trade based on their account size and risk tolerance. It ensures that each trade carries a controlled level of risk, usually expressed as a percentage of the account. Proper position sizing is a key part of risk management and helps traders stay consistent.

A profit target is a predefined level at which a trader plans to close a trade or complete a trading objective once a certain amount of profit is reached. It helps traders lock in gains and avoid holding positions for too long. In structured environments like prop trading, a profit target can also refer to the required return a trader must achieve during an evaluation.

A prop firm challenge is an evaluation process offered by proprietary trading firms that allows traders to prove their skills before being granted access to a funded trading account. Traders are given a simulated account with defined profit targets and risk parameters — such as maximum daily drawdown and overall drawdown limits — that must be met over a set period. Completing the challenge typically results in the trader receiving capital to trade with, keeping a percentage of the profits generated.

Prop firm rules are the set of guidelines traders must follow when participating in a prop firm challenge or managing a funded account. These rules are designed to control risk and ensure disciplined trading. They typically include limits on losses, position sizing, trading behavior, and overall account performance.

Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a basket of goods approach, suggesting that exchange rates should adjust so that identical goods cost the same in different countries. It is used to compare living standards and economic productivity across nations. In forex markets, PPP is one of several factors used to assess whether a currency is overvalued or undervalued.

QSBS stands for Qualified Small Business Stock, a provision under US tax law that allows investors in eligible small businesses to exclude a significant portion of capital gains from federal taxes when selling shares held for more than five years. It is designed to incentivise investment in early-stage companies. The exclusion can apply to gains up to $10 million or ten times the investor's cost basis, whichever is greater.

Qualified dividends are dividend payments from stocks that meet specific IRS criteria, making them eligible to be taxed at the lower long-term capital gains rate rather than the higher ordinary income tax rate. To qualify, the dividends must be paid by a US corporation or a qualifying foreign corporation, and the investor must have held the shares for a required minimum period. Qualified dividends offer a tax advantage compared to ordinary dividends.

The quick ratio is a liquidity metric that measures a company's ability to meet its short-term obligations using its most liquid assets, excluding inventory. It is calculated by dividing the sum of cash, short-term investments, and receivables by current liabilities. A quick ratio above 1.0 generally indicates the company can cover its short-term liabilities without relying on selling inventory.

Risk reward ratio refers to the relationship between the amount of money a trader is willing to risk on a trade compared to the potential profit they aim to achieve. It is usually expressed as a ratio, such as 1:2, meaning the trader risks $1 to potentially make $2. This concept is a key part of risk management and helps traders evaluate whether a trade is worth taking.

A recession is a significant and prolonged decline in economic activity, typically defined as two consecutive quarters of negative GDP growth. It is characterised by rising unemployment, declining consumer spending, reduced business investment, and lower corporate earnings. Recessions have a broad impact on financial markets, often triggering sell-offs across equities and commodities.

A repurchase agreement, commonly known as a repo, is a short-term borrowing arrangement in which one party sells securities to another with an agreement to repurchase them at a slightly higher price at a future date. The difference in price represents the interest on the loan. Repos are widely used in money markets to manage short-term liquidity needs.

The Sharpe ratio is a measure of risk-adjusted return that indicates how much excess return an investment generates per unit of risk taken. It is calculated by dividing the average return in excess of the risk-free rate by the standard deviation of returns. A higher Sharpe ratio indicates better risk-adjusted performance.

Silver futures are standardised contracts traded on exchanges that obligate the buyer to purchase, and the seller to deliver, a specified quantity of silver at a predetermined price on a future date. They allow traders to speculate on the price of silver or hedge existing exposure to the metal. Silver futures are influenced by industrial demand, investor sentiment, and macroeconomic factors.

A surplus refers to a situation where the amount of resources, goods, or money available exceeds what is currently needed or used. In economics, a surplus can refer to a budget surplus, where government revenues exceed spending, or a trade surplus, where a country's exports exceed its imports. In financial markets, surplus conditions can influence currency values and economic policy.

A tax extension is a formal request made to a tax authority for additional time to file a tax return beyond the standard deadline. In the United States, individual taxpayers can request a six-month extension using IRS Form 4868. Importantly, a tax extension extends the filing deadline but does not extend the deadline for paying any taxes owed.

Trading is the act of buying and selling financial instruments — such as stocks, currencies, commodities, or derivatives — to generate profit from price movements. It can be conducted across different time frames, from high-frequency algorithmic trading to long-term position trading. Trading requires a combination of market knowledge, technical skills, and disciplined risk management.

A traditional economy is an economic system in which production, trade, and distribution of goods and services are guided by customs, traditions, and historical practices rather than market forces or government planning. These economies are typically found in rural or agricultural communities and rely heavily on subsistence farming, barter, and inherited roles. Traditional economies have limited exposure to modern financial markets.

In economics, utility refers to the satisfaction or benefit a consumer derives from consuming a good or service. In financial markets, utility also refers to the utility sector — companies that provide essential services such as electricity, gas, and water. Utility stocks are typically considered defensive investments due to their stable revenues and consistent dividend payments.

Unclaimed money refers to financial assets — such as dormant bank accounts, uncashed cheques, forgotten investment accounts, or unpaid dividends — that have been held by financial institutions or government agencies after losing contact with their rightful owner. Most countries have processes that allow individuals to search for and reclaim these assets. In the United States, unclaimed property is typically turned over to state governments after a set period of inactivity.

USDC, or USD Coin, is a type of stablecoin — a digital currency pegged to the value of the US Dollar at a 1:1 ratio. It is issued by Circle and is backed by fully reserved assets, meaning each USDC in circulation is matched by an equivalent amount of US dollars held in reserve. USDC operates on blockchain networks and is widely used in decentralised finance (DeFi) and digital asset trading.

A value proposition is a statement that explains the unique benefit or value a product, service, or company offers to its customers, distinguishing it from competitors. In business and investing, it represents the core reason why a customer would choose one offering over another. A strong value proposition is a key driver of a company's competitive advantage and growth potential.

Venture capital (VC) is a form of private equity financing provided to early-stage or startup companies that are believed to have high growth potential. Venture capitalists provide funding in exchange for equity ownership and often take an active role in guiding the company's development. VC investment carries high risk but can deliver substantial returns if the company succeeds.

Volatility is a measure of the degree of variation in an asset's price over a given period. High volatility means prices are changing rapidly and unpredictably, while low volatility indicates relatively stable price movement. Volatility is a critical concept in trading, as it directly influences risk levels, position sizing, and strategy selection.

Wealth management is a comprehensive financial advisory service that combines investment management, financial planning, tax strategy, and estate planning to help high-net-worth individuals grow and preserve their wealth. It takes a holistic approach to a client's entire financial situation rather than focusing on a single product or service. Wealth managers work closely with clients to develop personalised strategies aligned with their long-term goals.

A warrant is a financial instrument that gives the holder the right, but not the obligation, to buy shares of a company at a specified price before a certain expiry date. Unlike options, warrants are typically issued directly by the company and result in new shares being created when exercised. They are often attached to bonds or preferred stock as an incentive for investors.

Web3 refers to the concept of a decentralised internet built on blockchain technology, where users have greater ownership and control over their data, digital assets, and online interactions. It represents a shift away from centralised platforms — as seen in Web2 — toward peer-to-peer systems powered by smart contracts and decentralised applications (dApps). Web3 underpins technologies such as decentralised finance, NFTs, and digital ownership.

Yield refers to the income generated by an investment over a specific period, expressed as a percentage of the investment's cost or current market value. It can apply to dividends from stocks, interest from bonds, or rental income from property. Yield is a key metric for income-focused investors and is closely monitored in fixed-income markets.

The yield curve is a graphical representation of the interest rates on bonds of the same credit quality but different maturity dates, typically plotted from short-term to long-term. A normal yield curve slopes upward, with longer maturities offering higher yields. An inverted yield curve, where short-term yields are higher than long-term yields, is widely watched as a potential indicator of a coming economic recession.

Year over year (YoY) is a method of comparing a financial metric or data point from one period to the same period in the previous year, allowing for meaningful comparisons that account for seasonal variations. It is commonly used to assess growth or decline in revenue, earnings, inflation, and other economic indicators. YoY comparisons provide a cleaner picture of performance trends than sequential month-to-month data.

Zero-based budgeting is a financial planning method in which every expense must be justified and approved from scratch at the start of each budgeting period, rather than simply adjusting the previous period's budget. It starts from a zero base, requiring managers to build their budgets by demonstrating the necessity of each cost. This approach can help organisations eliminate inefficiencies and allocate resources more effectively.

A zero coupon bond is a type of debt instrument that does not pay periodic interest payments. Instead, it is issued at a significant discount to its face value and matures at the full face value, with the difference representing the investor's return. Zero coupon bonds are sensitive to interest rate changes and are often used for long-term financial planning.