What does “Equity” mean?
The account equity or simply “Equity” represents the current value of your trading account.
Equity is the current value of the account and fluctuates with every tick when looking at your trading platform on your screen.
It is the sum of your account balance and all floating (unrealized) profits or losses associated with your open positions.
As your current trades rise or fall in value, so does your Equity.
If you do NOT have any open positions, then your Equity is the same as your Balance.
Equity = Account Balance
You deposit $1,000 in your trading account.
Since you haven’t opened any trades yet, your Balance and Equity is the same.
If you have open positions, your Equity is the sum of your account balance and your account’s floating P/L.
Equity = Account Balance + Floating Profits (or Losses)
You deposit $1,000 in your trading account.
Beyoncé tweets that she’s shorting GBP/USD. Because she’s Beyoncé, you follow what she says and go short also.
Price moves immediately against you and your trade shows a floating loss of $50.
Equity = Account Balance + Floating Profits (or Losses)
$950 = $1,000 + (-$50)
The Equity in your account is now $950.
Beyoncé tweets again and says she’s changed her mind. She’s now long GBP/USD.
Not only is she Crazy in Love, but she seems crazy in trading also.
But because she’s the Queen B, you follow what she says and go long also.
Price moves immediately in your favor and your trade shows a floating gain of $100.
Equity = Account Balance + Floating Profits (or Losses)
$1,100 = $1,000 + $100
The Equity in your account is now $1,100.
Your account equity continuously fluctuates with the current market prices as long as you have any open positions.
Equity shows the “TEMPORARY” value of your account at the current time. (Unlike a tattoo, which is…not temporary.)
That’s why Equity is seen as a “floating account balance“. It will only become your “real account balance” if you were to close all your trades immediately.
Let’s start with a simple answer.
If your account is “flat” or does NOT have any positions open, then your Balance and Equity are the SAME.
But if you do have open positions, this is when the Balance and Equity differ.
This means that when you’re looking at your Balance, it is NOT the actual real-time amount of your funds.
Since Equity includes current profits or losses from open trades, it is Equity that shows the real-time amount of your funds.
It’s possible to have a very large Balance, but very small Equity.
This happens when your open positions have a large unrealized (floating) losses.
For example, if your Balance is $1,000, and you have an open trade that has a floating loss of $900.
Your Equity is only $100.
In this lesson, we learned about the following:
In previous lessons, we learned:
Let’s move on and learn about the concept of Free Margin.