What is Equity in Forex Trading?
Quick Answer: Equity is your current account value including unrealized profits/losses (Balance + Floating P/L). It represents what you would have if you closed all positions right now. Equity fluctuates constantly and is used to calculate margin level and free margin.
What is Equity in Forex Trading?
Equity is the current value of your trading account, calculated as your balance plus or minus any unrealized profits or losses from open positions. It's the actual amount you would have if you closed all positions right now. Understanding equity is crucial for managing your account health and avoiding margin calls.
How Equity is Calculated
The formula is straightforward but critical to monitor:
- Equity = Balance + Floating P/L
- Balance: Your account funds before considering open trades
- Floating P/L: Unrealized gains/losses from current positions
Unlike your balance, which only changes when trades are closed, equity fluctuates constantly as market prices move. This real-time nature makes equity the most accurate measure of your account's current worth.
Practical Example
You start with $10,000 (balance). You open a EUR/USD long position that's currently up $500. Your equity is now $10,500. If the trade moves against you by $300, your equity drops to $10,200, even though your balance remains $10,000 until you close the position.
Why Equity Matters
Equity is the foundation for several critical account metrics:
- Free Margin: Calculated as Equity - Used Margin
- Margin Level: (Equity / Used Margin) × 100%
- Margin Call Trigger: Occurs when equity falls too low relative to used margin
Protecting Your Equity
Professional traders monitor equity obsessively. The 1% rule states you should never risk more than 1% of your equity on a single trade. When equity drops significantly from your starting balance, it's a sign to review your strategy, reduce position sizes, or step away. Remember: a 50% loss requires a 100% gain to recover.
Related Terms
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