Equity is a crucial metric in forex trading as it reflects the current value of your trading account in real time. Understanding how equity works helps traders manage risk, make informed trading decisions, and avoid margin calls.
What is Equity?
Equity represents the total value of your trading account, including all floating profits and losses from open positions.
👉 Formula for Equity:
- If no trades are open:
Equity = Account Balance - If trades are open:
Equity = Account Balance + Floating Profit/Loss
Your equity constantly fluctuates with the market as long as you have active trades.
How to Calculate Equity
✅ Scenario 1: No Open Trades
If you do not have any open trades, your Equity = Balance.
💡 Example:
You deposit $1,000 in your forex account but haven’t opened any trades yet.
✔️ Balance = $1,000
✔️ Equity = $1,000
✅ Scenario 2: Open Trade with a Floating Loss
If you have an open trade that is losing, your equity decreases.
💡 Example:
You deposit $1,000 and open a trade. The market moves against you, and your floating loss is -$50.
✔️ Equity = Balance + Floating P/L
✔️ $950 = $1,000 + (-$50)
🔴 Equity drops as your trade moves against you!
✅ Scenario 3: Open Trade with a Floating Profit
If you have an open trade that is profitable, your equity increases.
💡 Example:
You deposit $1,000 and open a trade. The market moves in your favor, and your floating profit is +$100.
✔️ Equity = Balance + Floating P/L
✔️ $1,100 = $1,000 + $100
🟢 Equity grows as your trade moves in your favor!
Equity vs. Balance: What’s the Difference?
| Metric | Definition |
|---|---|
| Balance | Fixed amount from closed trades |
| Equity | Real-time value (Balance + Floating P/L) |
📌 Key takeaway: Your Balance does not reflect open trade profits/losses, but your Equity does!
Why is Equity Important?
1️⃣ Determines Your Trading Power – Equity affects how much free margin you have to open new trades.
2️⃣ Helps Avoid Margin Calls – If your Equity drops too low, your broker may automatically close your trades.
3️⃣ Real-Time Account Value – Equity shows the true value of your trading account at any moment.
Final Thoughts
✅ Equity = The real-time value of your account
✅ If Equity drops too low, margin calls can happen
✅ Always monitor your Equity, not just Balance
Now that you understand Equity, it’s time to learn about Free Margin and how it impacts your ability to open new trades! 🚀
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