What does “Equity” mean?
The account equity or simply “Equity” represents the current value of your trading account.
Equity is the current value of the account and fluctuates with every tick when looking at your trading platform on your screen.
It is the sum of your account balance and all floating (unrealized) profits or losses associated with your open positions.
As your current trades rise or fall in value, so does your Equity.
How to Calculate Equity If You Have No Trades Open
If you do NOT have any open positions, then your Equity is the same as your Balance.
Equity = Account Balance
Example: Account Equity When You Have No Open Trades
You deposit $1,000 in your trading account.
Since you haven’t opened any trades yet, your Balance and Equity is the same.
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.
Equity = Account Balance + Floating Profits (or Losses)
Example: Account Equity When an Existing Trade is Losing
You deposit $1,000 in your trading account.
Beyoncé tweets that she’s shorting GBP/USD. Because she’s Beyoncé, you follow what she says and go short also.
Price moves immediately against you and your trade shows a floating loss of $50.
Equity = Account Balance + Floating Profits (or Losses) $950 = $1,000 + (-$50)
The Equity in your account is now $950.
Example: Account Equity When an Existing Trade is Winning
Beyoncé tweets again and says she’s changed her mind. She’s now long GBP/USD.
Not only is she Crazy in Love, but she seems crazy in trading also.
But because she’s the Queen B, you follow what she says and go long also.
Price moves immediately in your favor and your trade shows a floating gain of $100.
Equity = Account Balance + Floating Profits (or Losses) $1,100 = $1,000 + $100
The Equity in your account is now $1,100.
Your account equity continuously fluctuates with the current market prices as long as you have any open positions.
Equity shows the “TEMPORARY” value of your account at the current time. (Unlike a tattoo, which is…not temporary.)
That’s why Equity is seen as 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?
Let’s start with a simple answer.
If your account is “flat” or does NOT have any positions open, then your Balance and Equity are the SAME.
But if you do have open positions, this is when the Balance and Equity differ.
- The Balance reflects your profit/loss from closed positions.
- The Equity reflects the real-time calculation of your profit/loss. The Equity takes into account both open AND closed positions.
This means that when you’re looking at your Balance, it is NOT the actual real-time amount of your funds.
Since Equity includes current profits or losses from open trades, it is Equity that shows the real-time amount of your funds.
It’s possible to have a very large Balance, but very small Equity.
This happens when your open positions have a large unrealized (floating) losses.
For example, if your Balance is $1,000, and you have an open trade that has a floating loss of $900.
Your Equity is only $100.
Recap
In this lesson, we learned about the following:
- Equity is your account balance plus the floating profit (or loss) of all your open positions.
- Equity represents the “real-time” value of your account.
In previous lessons, we learned:
- What is Margin Trading? Learn why it’s important to understand how your margin account works.
- What is Balance? Your account balance is the cash you have available in your trading account.
- What is Unrealized and Realized P/L? Know how profit or losses affect your account balance.
- What is Margin? Required Margin is the amount of money that is set aside and “locked up” when you open a position.
- What is Used Margin? Used Margin is the total amount of margin that’s currently “locked up” to maintain all open positions.
Let’s move on and learn about the concept of Free Margin.