What's The Difference Between Equity and Balance in Forex?

What is Balance？ 

The account balance, or simply balance, is the amount of money in your forex account. If you deposit $5000 into your account, then the balance will be $5000. The balance is not affected by your trading activity until you close your open trades. Balance doesnt include any profits or losses that are to be realized by open trades, only reflects profits/losses from closed positions. It changes only when you deposit funds or close a trading position. Swaps and rollover fees also affect your account balance if you keep a trade open overnight. 

The swap in forex trading is a fee or interest rate a trader either pays or earns for a trade that is kept open overnight. The swap will be funded to your balance if you‘re paid and will be deducted if you’re charged. Swap fees are usually low but can add up if you trade more frequently or youre trading large positions.

The balance is displayed on the MT4 trading platform in the Terminal window under the Trade tab. 

What is Equity？ 

Equity reflects the current value of the trading account and fluctuates according to changes in open trades. It is the account balance plus unrealized profits/losses associated with open trades. Equity also takes into consideration the trading costs like swaps and commissions. 

Equity = Balance + Unrealized Profits/Losses

For example, if a trader goes long on the EUR/USD pair and the trade is showing a floating profit of $100. Lets assume the trading balance is $1000. In this case, the balance would be $1000 while equity will be displayed as $1100. This amount will keep fluctuating until the trade is closed, then it will be reflected automatically on the account balance.

If you have no trades open, then simply consider your Equity = Balance.

Related Equity Terms: 

• Balance Equity: it refers to the total funds in the trading account when there are no open trades. 

• Floating Equity: it is the future or unrealized profits and losses that are not reflected on your balance yet. This amount fluctuates as long as the trades are open. 

• Negative Equity: it happens when unprofitable trading ends up wiping the trading account. Yes, some traders may end up with greater losses than their balance. But luckily, many forex brokers offer a negative balance protection feature that helps traders avoid such incidents.  

Why is Forex Equity important？Forex equity is the value of a trader's account, corresponding to gains and losses. It matters since it displays the true value of the account and has an impact on a trader's capacity to carry on trading and overall profitability. Forex equity is crucial since it gives an overview of account value, influences margin requirements, affects risk management, and directly affects profitability.

Equity and Margin 

The margin is the amount of capital required to open and maintain trading positions. It acts like collateral that is kept aside by the forex broker in order to keep a trade open and ensure that potential losses are covered. The margin is released back into the account balance once the trade is closed. 

Free margin is calculated by subtracting the margin from the equity, and it is the available margin to open new trades. When there is no sufficient free margin to keep trades open, the trader is notified to top up the account with funds. This is known as the margin call. 

The formula for calculating the margin level is:

Margin Level = (Equity/Margin) x 100%

Equity Vs Balance Explained 

The account balance is all the existing cash capital in your account. While equity is the balance +/- unrealized profits or losses. The balance and equity are equal in case you have no open trades. 

Equity is usually lower than balance when the open trades are losing or when profits are smaller than swap and paid a commission. On the other hand, equity is higher than balance when existing trades are winning, and profits are greater than trading costs. So, equity reflects the variable value of the trading account, a real-time reflection of current profits/losses.  Sometimes it is referred to as the floating account balance. 

Why should traders monitor equity？ Equity shows the overall performance of all opened positions. It calculates how your balance will be when the trades are closed, so it provides more accurate data than the balance. Some bad trades can cost you most of your account balance, this is why a trader should always consider keeping an eye on equity.

How important is it to track your Trading Equity？

Let‘s begin by exploring an alternative definition of equity, which refers to the combined value of a trader’s forex balance and any unrealized profits or losses related to their open trading positions. Equity is a reflection of the current status of all active trading positions.

When the margin is subtracted from equity, the remaining amount is referred to as free margin, which can be utilized to initiate new trades. However, if the free margin isnt adequate to sustain existing trades, the broker will send a notification to the trader to top up their balance. Failure to respond to this margin call will result in the broker forcibly closing all open positions if the market moves unfavorably to the trader.

The notification from brokers for traders to add funds to their accounts is commonly known as Margin Call, while the situation where brokers forcibly close a traders positions due to insufficient funds is called Stop Out. Margin call and stop out limits differ among brokers and are typically detailed in the specifications for a forex account. As a trader, it is crucial to keep track of your equity and free margin levels to avoid losing your trading deposit.

Forex Balance Vs Equity: What Matters Most？

Equity and balance clearly differ significantly from one another. Additionally, we now understand which one requires closer attention. Due to the vital components, it contains, failing to pay attention to your equity will only hinder your ability to trade profitably. The balance, however, does not contain any items that are important enough to influence the results of deals.

The progress of your equity will depend on how well your trading strategy and risk management concepts work together with your money management. It will also have an impact on how many trades you can execute using the money indicated in your forex balance. Due to the fact that doing so will merely bring your account closer to the stop-out level, you cannot afford to trade recklessly or haphazardly. Your equity will no longer be able to sustain additional trading activities once it hits that point, and your FX balance will be zero.

How to Open Forex Account in a Few Steps

A forex account is used to trade foreign currencies. Typically, you open an account, deposit money and then buy and sell currency pairs. Opening a forex trading account is a quite simple process these days given the growth of online forex trading. It requires some paperwork and a few security steps, such as identity verification, and all can be done online. But first, youll have to choose your forex broker, select an account type, register then activates your account. 

You can choose between various account types, based on your trading strategy, experience, and capital designed for investment. Choices include Standard, Cent, or ECN trading accounts. Enjoy favorable trading conditions with Aximtrade; especially when it comes to margin and leverage levels. You can control your real-time risk exposure by monitoring your used and free margin as together make up your equity. 

AximTrade provides a leverage range that helps you choose your preferred risk level. The leverage ratio depends on your account type and equity, up to infinite leverage, and can be reduced by applying custom leverage.

Follow these steps to open a forex account with AximTrade:

• To open a forex account, log in to your member account from AximTrade login, and click on the “+ Open Extra Account” button on the top right. 

• Choose your preferred account type. You can choose between Standard, Cent, and ECN accounts. You can also choose a demo account if youre a beginner. 

• Select your account and press “Open”. 

• Name the Account and create both trading and investor passwords for your account. The investor password should not be the same as the account password. Remember to use both uppercase and lowercase letters and use a combination of numbers and letters. Then click “Done”.

• Now your account is ready for trading. You can find all your accounts in the “My Accounts” tab. 

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.