he account equity or simply “Equity” refers to the current amount of money in your trading account plus or minus any floating profit or loss from open positions.
The Equity is in direct interconnection with the value of your trades, when the value goes up or down, so the Equity follows this fluctuation.
If you don’t have any open trades, your Equity will be equal to your Balance.
If you deposit 5,000, for instance, this will be your balance AND the amount of your Equity. Without open positions, they will be the same as each other.
How to Calculate Equity If You Have Trades Open
If you have open positions, your Equity is the sum of your account balance and your account’s floating P/L.
CASE 1: How much is your Equity if your trade is losing?
You deposit $5,000 in your trading account.
But suddenly somebody tweets that she’s shorting GBP/USD.
Because he is a powerful person, you follow what she says and go short also.
If they were wrong and the price moves immediately against you, you will have a floating loss of $100. This will mean that your Equity will become 4,900.
This will be your Account Equity with the Floating Loss!
CASE 2: How much will be your Equity if your trade is winning?
Let’s go back in time. The person changed his opinion and tweeted that he will go long with GBP/USD.
You believed him, you followed him again.
This time he is right! Price moves immediately in your favor and your trade show a floating gain of $150.
This will be your Account Equity with Floating Profit!
Your account equity continuously fluctuates with the current market prices as long as you have any open positions.
Don’t forget that Equity shows the “TEMPORARY” value of your account at the current time. It is sometimes called a “floating account balance“. It will only become your “real account balance” if you were to close all your trades immediately.
What is the difference between Balance and Equity?
There is one main thing that differs them.
You have to have open positions, in order to not be the same as each other.
When you do have open positions, your equity will show the current value of your profit or losses plus the balance, which won’t be real unless you close the trade. Equity is a real-time calculation. Balance is the actual funds that you have at your disposal.
It’s possible to have a very large Balance, but very small Equity.
This happens when your open positions have largely unrealized (floating) losses.
For example, if your Balance is $5,000, and you have an open trade that has a floating loss of $4900.
Your Equity is only $100.Account Equity with $4900 Floating Loss
Let’s move on and see what is the Free Margin.