Lesson 6: What Is Account Equity?

You may have heard the term “equity” thrown around in trading, often used with shares, stocks, and traded instruments. However, equity carries a different meaning when you use it in forex trading. 

In this lesson, you’ll learn all about account equity and its relevance in forex trading. 

Lesson Highlights 

• Equity in forex has a different meaning from equity in stocks. 
• Your account’s equity value is dependent on your account balance and floating P/L. 
• Floating profits increase your account’s equity value while floating losses reduce it. 
• There are different ways of calculating account equity, depending on whether you have open positions or not. 
• Your account’s equity value affects your trading account balance and vice versa. 

What Is Account Equity in Trading? 

Equity—or account equity, if you’re using it in forex—refers to your trading account’s present value. As equity reflects your account’s current value, it fluctuates in tandem with your trading account’s every move. 

As your current account balance directly impacts your equity, factors that can increase or decrease it also affect equity. 

For example, your account’s equity value will be higher than your current balance if you have unrealized or floating profits from your open positions. Conversely, the equity value of your account will be lower than your account balance if your open positions have unrealized losses.

Remember, the method for computing account equity varies depending on whether you have open positions.

Calculating Equity Without Open Positions 

You can easily know your account’s equity value when you don’t have any open positions. If this is the case, then 

Equity = Account Balance

You simply have to check your current account balance, and you’ll know how much your account equity is as well. 

For example, if your current balance is USD 1,000.00, that is also your account’s equity value. 

Calculating Equity With Open Positions 

Determining your account’s equity value involves a little addition when you have open positions. You can use the formula below when computing equity value with open positions. 

Equity = Account Balance + Floating P/L  

1. Let’s say that your current account balance is USD 2,500.00. 
2. You have USD 3,000.00 in unrealized profits from your open positions. 
3. Add your unrealized profits (USD 3,000.00) to your current account balance value 
4. USD 2,500.00 (account balance) + USD 3,000.00 (floating profits) = USD 5,500.00 (equity value) 

Using the above formula, you can see that your account’s equity value is USD 5,500.00, higher than your account balance. 

Calculating Equity With Floating Losses in Open Positions 

The formula slightly differs when you have floating losses instead of profits. In this case, the formula will become: 

Equity = Account Balance – Floating P/L 

1. You have USD 2,500.00 in your account balance 
2. You have USD 3,000.00 in unrealized losses 
3. Decrease your current account balance (USD 2,500.00) by your unrealized losses (USD 3,000.00) 
4. USD 2,500.00 (account balance) - USD 3,000.00 (unrealized losses) = USD -500.00 (equity value) 

Balance vs. Equity 

Account balance and equity are related concepts in forex trading. Equity is affected by your account balance, and it likewise affects how much balance you have. 

Changes in your equity are always reflected in your account balance and vice versa. When your account balance increases, so does its equity value. Likewise, a decrease in your account’s equity value also reduces the amount in your account balance. 

In the next lesson, you’ll learn about free margin, another concept related to the amount of money you have in your trading account.