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EQUITY

In forex trading the concept of equity refers to the total value of a trader’s account when any open positions have been factored into the equation. When the trader has active positions in the market (i.e. when the trader has open trades), the equity on the forex account is simply the sum of the margin put up for the trade from the forex account plus the free or usable margin, which is called equity. When there are no active trade positions, the equity is the same as the free margin, and is also the same as the balance on the account.

Before getting into currencies make sure you clearly understand the difference between account balance and account equity.

Uses of Equity

For example: Equity is your account balance and the floating profit/loss of your open positions:

Equity = Balance + Floating Profit/Loss

When you don’t have any open position then there is no floating profit/loss which means your account equity and balance are the same. If for example, your starting account balance is $5000, when you have some open positions and that they are $1,500 in profits in total, then your account equity is your account balance of $5000 plus $1,500. If your positions were $1,500 in losses, then your account equity would be your account balance of $5000minus $1,500.

When you have no position, no money from your account is used as the margin. Therefore, all the money you have in your account is free. As long as you have no position, your account equity and free margin are the same as your account balance.

Let’s say you have a $5,000 account and you have some open positions with the total margin of $500 and your positions are $200 in profit.

Therefore: Equity = $5,000 + $200 = $5,200

Free Margin = $5,200 – $500 = $4,700

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