If you are thinking about getting involved in the Forex market, you are probably going to come across a few terms that you do not know or that sound new. One of them might be equity. Equity refers to the amount of money you have in your trading account. The value of the account will fluctuate with every tick of the market. Therefore, your account balance is going to represent your unrealized gains and losses, which is referred to as equity. As the value of your positions rises and falls, your account equity is going to change.
How Do You Calculate Your Equity?
If you do not have any open positions, then your equity is the same as your account balance. If you have open trades, then the calculation changes slightly. You might have floating profits or losses. In this case, your equity is equal to the sum of your account balance plus your floating profits or losses. This means that your equity might be greater than your account balance (if you have outstanding floating profits from open positions) or less than your account balance (if you have outstanding floating losses from open positions).
What Is the Difference Between Your Account Balance and Your Equity?
It is easy to get these terms confused, so it is important to keep a few key points in mind. These include:
- If you do not have any open positions, then your account balance and equity are the same.
- Your account balance reflects your profit and loss from any closed positions you might have.
- Your equity is a real-time value that takes into account your open and closed positions.
As a result, when you are looking at your balance, it is not the real-time amount of funds you have, which is a common misconception. Remember that your equity includes your real-time profits and losses. Therefore, it is possible for you to have a significant account balance but relatively small equity. As an example, you could have an account balance of $2,000 but a floating loss of $1,800 from an open trade. As a result, your equity is only $200. It is important for you to understand this difference, so you know the status of your account.
Know the Difference Between the Two Terms: Equity and Account Balance
It is important for you to understand the difference between equity and account balance. This is going to have a significant impact on your ability to trade at will on the Forex market. You need to make sure you understand what your floating profits and losses are. Then, you need to understand what free cash you have available to trade. Otherwise, you could end up facing a margin call. With a bit of practice, you will have an easier time interpreting the numbers you see on your account screen.