4 Oct, 2023

What is Equity?

Equity in trading refers to the current value of an account after accounting for open positions. It's the remaining balance available for trading or withdrawal, calculated by subtracting used margin and unrealized losses from the account's total value.


So, what exactly is "Equity"?

Equity, also known as the account equity, represents the current value of your trading account. It's a dynamic figure that changes with every tick as you monitor your trading platform.

Equity is calculated as the sum of your account balance and all the floating (unrealized) profits or losses associated with your open positions. As the value of your current trades fluctuates, so does your Equity.

How to Calculate Equity When No Trades Are Open

When you have NO open positions, your Equity is equal to your Balance:

  • Equity = Account Balance

  • Example: Account Equity with No Open Trades

Let's say you deposit $1,000 into your trading account. Since you haven't entered any trades yet, your Balance and Equity are both $1,000.

How to Calculate Equity When Trades Are Open

If you have open positions, your Equity is determined by adding your account balance to your account's floating P/L:

  • Equity = Account Balance + Floating Profits (or Losses)

  • Example: Account Equity with an Existing Losing Trade

Imagine you deposit $1,000 in your trading account. Following Beyoncé's tweet, you go short on GBP/USD, and immediately, the trade incurs a floating loss of $50.

  • Equity = Account Balance + Floating Profits (or Losses)

  • $950 = $1,000 + (-$50)

Now, your account's Equity is $950.

Example: Account Equity with an Existing Winning Trade

Beyoncé tweets again, changing her mind and going long on GBP/USD. You follow suit. Price moves in your favor, and your trade shows a floating gain of $100.

  • Equity = Account Balance + Floating Profits (or Losses)
  • $1,100 = $1,000 + $100

At this point, your account's Equity is $1,100.

As long as you have open positions, your account's equity will continuously fluctuate with the current market prices. It represents the temporary value of your account at the current time. However, it will only become your real account balance if you were to close all your trades immediately.

Understanding the Difference Between Balance and Equity

Let's simplify the distinction between Balance and Equity:

  • Balance: This figure reflects your profit/loss from closed positions.

  • Equity: Equity provides a real-time calculation of your profit/loss, considering both open AND closed positions.

When your account is "flat" without any open positions, your Balance and Equity are identical.

However, when you have active positions, this is when the Balance and Equity diverge.

Your Balance doesn't represent the actual real-time amount of your funds because it only considers closed positions. On the other hand, Equity, which includes current profits or losses from open trades, reflects the real-time status of your funds.

A situation may arise where you have a substantial Balance but a much smaller Equity. This occurs when your open positions incur significant unrealized (floating) losses.

For instance, if your Balance stands at $1,000, but you have an open trade showing a floating loss of $900, your Equity would be just $100.

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