What Is Equity in Forex Trading?
A trader's account equity represents the current value of their account at any moment in time. It can fluctuate throughout the day, depending on the open positions currently held. Keep reading to find out more about equity in Forex, how it differs to account balance, how it’s calculated and much more!
The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.
What Is Equity in Forex?
In Forex trading, your account equity measures the total current value of your trading account, including any unrealised (floating) profits and losses from open positions.
Consequently, whilst you have open trades, your account equity will fluctuate in value along with any unrealised profits or losses from these positions.
Equity vs Balance
Your account balance reflects the total amount of money in your trading account from deposits and any profit or loss from closed positions. It does not take into account any positions which are currently open. On the other hand, equity takes into account any floating profits or losses from open trades.
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How to Calculate Equity in Trading
If a trader has no open positions, the account equity will have the same value as the account balance.
| No Open Positions: Equity = Account Balance |
However, if a trader has positions open, the account equity is calculated as follows:
| Equity = Account Balance + Unrealised Profit/Loss |
For example, let’s imagine you open a Forex account and deposit $10,000.
You then open a trade but, unfortunately, the market moves against you, putting your position $1,000 in the red. Here’s what would have happened to the equity.
The account balance doesn’t change when you open a position. Consequently, in the example above, despite the unrealised loss of $1,000, the account balance would have remained $10,000 until the trader closed their position.
Once the position is closed and the profit or loss is locked in, the account balance will be updated accordingly.
What Is the Relationship Between Margin and Equity?
When trading on margin, equity plays an important role in determining how much capital is available to open and maintain positions.
| Margin: The deposit required by a broker to open and maintain a leveraged position. |
When a trader opens a position, a portion of their account equity becomes used margin; this is the collateral which is tied up in order to maintain the leveraged position.
The remainder of the trader’s equity is known as free margin, which can be used to open new positions.
| Equity = Free Margin + Used Margin |
Consequently, as equity rises and falls, it impacts a trader's ability to open new positions or to maintain existing ones.
The relationship between the two can also be seen in the margin level, which expresses equity as a percentage of used margin. Brokers use margin level to assess whether a trader can open new positions and also to attempt to protect clients from excessive losses.
| Margin Level = (Equity / Used Margin) x 100 |
A margin level of 0% implies that there are currently no open positions, whereas a margin of 100% implies that equity is currently equal to used margin.
Anything over 100% tells us that equity is greater than used margin, whereas anything under 100% indicates the opposite. Brokers have margin level limits at which point they will trigger margin calls and enforce stop outs.
To read more about margin, margin level and margin calls, check out our article “What Is Margin in Forex Trading”.
Where to Find Equity in Your Account
Depending on your broker, there are a few options for finding out your current account equity.
With Admiral Markets, you can log in to the Dashboard and select ‘Portfolio’ from the ‘Trade’ drop down in the menu on the left-hand side of the screen.
Here, you will be presented with a list of your open positions and pending orders. At the top of the screen, you will also see your current account equity, as well as your available funds and margin level.
Alternatively, traders can also find out their account equity directly in the trading platform. In MetaTrader 4 and MetaTrader 5, you will find it in the ‘Trade’ tab of the Toolbox at the bottom of the screen.
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Frequently Asked Questions
How to increase equity in Forex?
Traders can increase their account equity by depositing funds into their account or by registering winning trades. However, bear in mind that losses (both unrealised and realised) will decrease account equity.
What is the difference between balance and equity in Forex?
The account balance represents the money available in a trading account before any positions were opened. On the other hand, equity is the account balance plus any unrealised profit or loss from open positions. If there are no open positions, then account balance and equity will have the same value.
What happens when equity is zero in Forex?
If your account equity is zero because you’ve withdrawn all your funds or not yet made a deposit, you won't be able to open any trades until you deposit funds into the account.
When trading on margin, if you have open, losing positions and your margin level (equity / used margin) falls to a certain level, your broker will attempt to automatically close your losing positions. The level at which this happens is known as the “stop out level”. Most brokers would attempt a stop out before your account equity reached zero.
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