So, you’ve made the decision to use a prop firm to get started in forex trading? Great move! By trading with a proprietary firm, you can access additional funds, lower your own risk, and develop your skills in a professional atmosphere. You must master terminology before you can begin making trades and chasing pip profits.
Forex has its own language which you must speak well if you want to succeed in this field. If you’ve ever been confused by discussions regarding leverage, stop-outs, or drawdowns then don’t panic (you’re not alone). Every trader begins somewhere. Let’s see the essential terms for forex trading in a prop firm context in a way that makes clear.
Prop Firm (Proprietary Trading Firm)
Let’s begin with the fundamentals. Prop firms which are short for proprietary trading firms, use company resources to finance traders rather than asking them to spend their own funds. In exchange, the trader gives the company a portion of their earnings. The concept is straightforward: if you are an experienced trader then the company benefits from your success so everyone wins.
Funded Account
All aspiring prop traders want to have a funded account. After passing the company’s assessment, which typically involves showing your reliability and risk-management abilities, you are granted access to a genuine account with actual funds. The actual game starts here!
Leverage
In simple terms, leverage is borrowed funds that enable you to manage a bigger position than your actual account balance would permit. Prop firms typically provide a range of leverage levels including 1:10, 1:50, and even 1:100. Leverage increases the possible reward but also the risk.
Drawdown
In prop firm trading, this word is frequently used. When your account balance drops from a high to a low and then rises again, it’s called a drawdown. Prop companies impose strict drawdown restrictions, typically in the form of daily and overall drawdowns (the maximum amount of money you can lose in a day and the maximum amount of money you can lose before being cut off). If it’s exceeded, you’re out.
Stop-Out Level
When you reach a predetermined loss limit, your account automatically terminates open deals. Prop companies frequently have tight stop-out policies in place to protect their money. You’ll reach this stage sooner than you expect if you don’t effectively manage risk.
Profit Split
Prop companies don’t give their money out for free, but they do allow you to trade with it. A portion of your profits are distributed to the company. Typical profit shares include 80/20, 70/30, and occasionally even 90/10 when the trader keeps the larger portion.
Risk Management
You will hear this term a lot because it’s crucial in the prop trading industry. Risk management involves restricting the amount of your account that is at risk on each trade, establishing stop losses, and making sure that you stay under your drawdown limits. Because careless traders rapidly lose cash, prop companies prefer traders who effectively manage risk.
Lot Size
The typical unit of exchange in forex trading is a lot. Three typical lot sizes are as follows:
Standard lot (1.0 lot) = 100,000 units of the base currency pair
Mini lot (0.1 lot) = 10,000 units
Micro lot (0.01 lot) = 1,000 units
Trading big lots without managing your risk is a certain way to blow up your account.
Pips and Pipettes
The smallest price change in a forex pair is called a pip which is short for percentage in point. It typically occurs in the fourth decimal place, with the exception of JPY pairs, when it occurs in the second. Since a pipette is a tenth of a pip, it is an even smaller unit of measurement.
Spreads
The spread is the difference between a forex pair’s ask (purchasing) and bid (selling) prices. Prop firms may offer a variety of spreads for their accounts; tight spreads are preferable because they lower trading expenses.
Slippage
Have you ever noticed how your trade may execute at a price that differs from what you clicked? That is slippage. This occurs when the market is moving quickly and you don’t obtain the precise price you were hoping for. The usual culprits are limited liquidity and high volatility.
Liquidity
Liquidity refers to how easily an asset can be bought or sold without affecting its price. The forex market is generally very liquid, but during major news events or in exotic currency pairs, liquidity can drop, leading to wider spreads and higher slippage.
Swing Trading vs. Scalping vs. Day Trading
- Scalping: Super short-term trading, aiming for small, quick profits within minutes.
- Day trading: Opening and closing trades within the same day, no overnight holds.
- Swing trading: swing trading is holding trades for several days or even weeks to catch bigger moves. Prop firms often have rules about which styles they allow, so always check their policies.
