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.
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.
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.