What is the difference between balance and equity in forex?
In forex trading, both "balance" and "equity" are important terms that reflect different aspects of your trading account's financial status. Understanding the difference between them is crucial for managing your trades and risk effectively.
Balance: Your account balance is the total amount of money you have deposited into your trading account. It represents the initial capital you have available for trading before any profits or losses are taken into account. Your balance remains constant until you open a trade.
For example, if you initially deposit $10,000 into your trading account, your balance will be $10,000 until you execute a trade.
Equity: Equity, on the other hand, is a more dynamic measure that takes into account both your account balance and the unrealized profits or losses from your open trades. Equity is calculated by adding your account balance to the floating profit or loss on your open positions.
Mathematically, Equity = Balance + Floating Profit/Loss
Here's how it works:
If you have open positions that are currently profitable (floating profit), your equity will be higher than your balance.
If you have open positions that are currently in a loss (floating loss), your equity will be lower than your balance.
For example, if you have a balance of $10,000 and you have an open trade with a floating profit of $500, your equity would be $10,500.
Equity is an essential measure as it reflects the real-time value of your account, including both your original capital and any potential gains or losses from your open trades. It gives you a more accurate picture of how your trading is performing at any given moment.
Key Takeaway:
Balance is the total amount of money you have deposited in your trading account and remains constant until trades are executed.
Equity takes into account your balance as well as the unrealized profits and losses from your open trades, providing a dynamic view of your account's value.
Both balance and equity play significant roles in risk management and position sizing. As your equity changes, it can impact the amount you're willing to risk on new trades, helping you make informed decisions to protect your capital.