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.