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

Equity in Forex can be two things. It can either be your account balance, or your future account balance. Whenever you do not have any trades open your equity is equal to your balance, however, when there is a trade active the whole process becomes a bit more complicated.
 
Imagine that you have a USD/JPY trade open. The terminal is telling you that you are currently 500 Euros in profit. This would immediately affect 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 $1000 when you started the trade, and now are in $500 profit (that’s pretty good actually). Your account balance would still be $1000, but your FX equity would be $1500. 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 $1500, 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.
 
There are a couple of types of equities a trader can have such as

  • Available equity
  • Negative equity
  • Positive equity

But those will be explained later in the guide.

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What other ways is equity referred to in Forex?

In most cases, you will see equity paired up with the word “margin”, which is not something too hard to understand. Here are the words you will usually see about margin.
 
  • Free margin
  • Available margin
  • Usable margin
  • Floating margin or margin held
 
Free margin is basically equity in Forex, and therefore the sum of funds you have available to trade with. Let’s try and bring an example to make it a bit easier.
Equity and balance in Forex
Imagine you have $1000 on your balance. As long as you don’t open any new trades, that $1000 will be your free margin. But let’s say, you just opened a $300 trade for USD/JPY. This is what your margin would look like.
 
You would have $700 of free margin (it can also be called usable or available margin) and $300 would be your floating margin.


What is equity in Forex? Is it dangerous?

It is very hard to call equity dangerous, but it does have some risk to it. You see, equity is usually displayed on the trading terminal you are using. Be it MT4 or MT5 it is usually found in the bottom left corner.
 
There could always be a moment when you simply don’t look at the equity part of your finances and only look at the balance.
So, why is this a problem? Well, whenever you look at the balance, you are not really seeing the actual amount of funds you have left on your account. You are seeing the funds you had before you opened a trade. That trade you opened could be in a very bad situation and costing you half of your balance.
 
But, when you see that you have a pretty large balance, you may be more likely to open a new trading position and put your funds in danger. It’s always important to distinguish equity vs balance when Forex trading. This small mistake could be very serious for your account.


Margin makes it slightly harder to understand

Margin with equity could be a bit complex. The number of names this feature has compared to how many things it can do in the market is very unproportional. The only thing you need to know about margin with equity is that:
 
Free margin = equity including all the trades you have open
 
Margin held = the number of funds you have opened as a trade
 
That’s about it.


What is balance equity?

Balance equity or account equity Forex is the number of funds you have on your account without having any trades open.
So, if you have $1000 on your balance and you just let it sit there without starting to trade, your equity will be $1000.


What is floating equity?

Floating equity is basically all the funds you have that are not on your balance yet. Imagine you opened a trade for $300 on USD/JPY. After one day you find out that you are already in a profitable position. Your $300 trade has turned into $450. If that $300 was your initial balance, then your balance will still be $300, but your equity will be $450 because you have that extra $150 as floating equity.


What is negative equity?

Negative equity is what happens when your trade was so unprofitable that it wiped your account clean. Yes, things like that sometimes happen, equity and balance in Forex can be extremely tricky. Imagine that you have a balance of $1000, and you open a trade of $500 for USD/JPY.
What is equity in Forex
Suddenly, you start losing on the trade because something happened to the Yen and its price is dropping. If it’s not attended quickly, it can possibly cost you that $500 you started the trade with and then reach your $500 remaining on your balance. If not stopped at that point, a trader can even go into negative equity. The only way to stop this would be to deposit more on the account and close the trade.
 
The best way to avoid this would be to use stop-loss orders.

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Equity in Forex - Key takeaways

Equity is both your account balance as well as your future account balance. It calculates how much you can potentially have after closing an active trade.
 
Equity can be a bit tricky, which is why it needs a lot of attention. If left by itself, there’s a chance a trader can slip in negative equity, which is one of the worst positions one can find themselves in.
 
Equity 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. 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 large 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?

Well, FX trading equity is important because it helps traders see whether they can open a new position or not.

Imagine that you have a trade open that is extremely profitable, but it’s pretty slow. You are aware that you have enough funds on your account to open a new trade because that’s what your equity is telling you. So you open new trade and direct that newly gained equity from your previous trade to your new trade. If your decision was correct, your profits would become much larger.

However, when the first trade is unprofitable, the equity tells the trader that there’s not as much available on his or her balance to start a new trade. So it’s like a warning sign to simply close one losing position as fast as possible before starting a new one.
 

Where can I find my equity?

Your FX equity can be found on the software you are using to trade. In most cases, it is at 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.

If 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?

Technically it does. If you don’t have enough equity, you can’t open a new trade simply because your balance will not allow it. The more equity you have the more trades you can have open, which means the more profits you can generate.

Equity in Forex is basically what helps you grow as a trader, increase the number of trades you have open, and how much profits you generate as a whole. Without it, it would be impossible to trade at all.

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