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.