What is equity in Forex trading and why is it important?

26 February 2020

Equity in Forex simply tells traders how much money they currently have when trading orders are active. Equity equals trading balance +/- current profits or losses from active trades. Once all trades are closed, the equity becomes a trading balance.

Imagine that you have a USD/JPY trade open. The platform is showing you that you are currently 500 Euros in profit. This is also displayed in Equity. The balance would show exactly the same amount you had when you opened the trade, but the equity will be showing an adjusted amount.

Let’s say you had $10,000 when you started the trade, and now are in $500 profit. Your account balance would still be $10,000, but your FX equity would be $10,500. The system understands that you can close the trade at any time and increase your balance, so it does the calculation before you actually close.

Once you do close the trade and your account balance becomes $10,500, nothing will change about the equity. It will immediately see that you have now a larger balance but no trades open, so the balance will be equal to the equity.

watch our video to find out what equity is

Equity in Forex meaning

Understanding the meaning of equity in Forex is not difficult. Novice traders need to learn about terms such as equity, margin, trading balance, smart stop out and how they interact with each other.

As already mentioned, equity is your balance plus/minus results from active trades. Equity number changes all the time as prices make certain moves. What's more, equity incorporates any additional fees. For instance, if you keep a position open overnight, the swap fee will be automatically deducted from your Equity. In addition, swap will also be deducted.

Trading balance, margin, smart stop out and equity

Once you make your first deposit, it gets placed on your trading balance. As you open a trade, equity shows how your balance is changing in real time. Once the trade is closed, the equity becomes the trading balance. Forex trading is a leveraged activity, which means that traders are using borrowed funds from their broker to increase purchasing power. Margin helps traders understand how many additional trades they can open. In particular, the amount of free margin is critical.

How to use equity properly?

Equity is usually displayed on the trading terminal you are using. Be it MT4 or MT5 or any other, it is typically found in the bottom of trading platforms. Many traders make that mistake and focus on Equity numbers too much. Remember, the markets don't care about how much money you need. To make money, you should focus on price action, technical and fundamental analysis and not on equity. Many traders open single positions and stare at equity numbers, praying for the price to go positive. Such actions are always bad for trading balance. A single trade should never become so significant that it takes all the energy and attention of a trader. The best trading happens when you can analyze the markets, open trades when great opportunities present themselves and start searching for other opportunities right away, while still having active orders. When you have a good risk management in place, you can open various orders simultaneously. Staring on the equity numbers instead of searching additional trading opportunities is a terrible idea.

Often traders look at their balance, look at their equity and if equity is smaller than balance, they refuse to close orders unless they both become at least equal. Losing traders fail to accept losses, and they all say the same thing that they'll get out of the trade when they're even. Consequently, they move or remove stop loss orders or double their trading positions. Both are a terrible idea. Adding to a losing position typically leads to a disaster, more losses and blown up accounts.

Equity in Forex – Key takeaways

Equity is both your account balance and your future account balance. It calculates how much you can potentially have after closing all active trades.

Equity can be a bit tricky, which is why it needs a lot of attention. When traders use oversized positions, high leverage and trade without a stop loss in a highly volatile market conditions, there's a chance of slipping to negative equity and ultimately negative balance. Which is one of the worst positions one can find themselves in if a broker doesn't offer negative balance protection.

Equity trading and margin go hand in hand. Free margin is your available balance, and margin held is how much your open trade is worth.

FAQ on FX equity

Can I have negative equity?

Yes. As we have discovered in this guide to what does equity mean in Forex, it’s possible to have negative equity and balance in Forex, especially if you’re not paying attention to your trades.

This happens when an open trade starts losing so much that your margin held starts using your available margin to somehow stay open. That’s right, the trade is programmed to stay open as long as possible before the trader simply indicates for it to close.

Naturally, the broker may stop it themselves if there is leverage or any other resource being used. But if it’s on its own, then there is a good chance the broker won’t touch it.

The best way to avoid negative equity is to always have stop-loss orders. This will basically tell the system that once losses reach a certain amount, the trade needs to be closed.

Why is equity important?

When FX trading, equity is essential because it helps traders see how much money they actually have from active trades real time. Equity and balance are often displayed close to one another, which makes it easier to keep an eye on your trades' progress in terms of real time returns.

Some traders use equity to determine when to exit trading positions. However, this is not recommended. Exits should be dictated by the price action, price patterns, technical and fundamental analysis and not on equity. For instance, some traders do not take 498 USD profit and wait the price to give 500+ USD, in other words, they are waiting for round numbers on the equity for their trading balance to look nice. Which is a terrible idea. One should never base exit strategies on equity.

Where can I find my equity?

As the above page on what is equity in trading shows, your FX equity can be found on the software you are using to trade. In most cases, it is in the bottom-left corner of the terminal. If you’re using MT4, then it will most likely show as colored text right next to your balance.

If you’re using MT5, then you can find it in the Trade tab of the terminal, once again next to the account balance.

In case, for some reason, you think that the equity on your account is wrong, then the best thing to do is contact the broker and ask a professional to give it a look.

Does equity affect me as a trader?

When your open positions lose money and your equity decreases, you become under psychological risks. Most traders compare their trading balance and equity and plan to get out of trades when they're even, in other words, equity and balance become close to each other. Hoping for the price to reverse is a bad idea. It's always best to take a small loss than to move the stop loss away from the original point.

What is the difference between balance and equity in forex?

When a trader makes an initial deposit, the deposit is placed on a trading balance. A balance is all the money you have on your trading account. Equity is trading balance +/- any profits/losses from your active position. In other words, equity shows you how much money you will have if you instantly close all the active trades. For better understanding, let's say this example: let's say you had 3k USD on your trading balance and opened a trade that has moved a jump towards the predicted direction. It shows 50 USD profit if you close the order right now. Your equity is 3k USD +50 USD = 3050 USD. Your balance = 3k USD. If you decide to close the trade instantly, your balance will become 3050 USD.

What is account equity in forex?

When trading Forex, you can open multiple live and demo accounts. An account equity is the amount of funds that you have in a given account +/- the amount of your active trades. Equity shows how much money will be in your account balance if you close all of your active orders. If you keep positions active overnight and get charged with swap fees, the equity will automatically deduct the swap number.