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The Account Equity or simply “Equity” represents the current total value of your trading account. This is the most important figure to monitor as a forex trader.
Equity is the sum of your account balance (the cash deposited into your trading account) and the unrealized (floating) profits or losses from your open positions. It is the current value of your entire trading account.
Equity fluctuates with every price movement in the market. As your open positions gain or lose value, your equity rises and falls accordingly. This is because the unrealized profits and losses from your open trades are factored into your total equity.
For example, if you have an account balance of $10,000 and your open long position on EUR/USD is currently showing an unrealized profit of $500, your total equity would be $10,500. Conversely, if you had an unrealized loss of $300 on that same position, your equity would be $9,700.
Equity is the true representation of your trading account’s worth at any given moment. It is the amount of money you would have left if you were to close all your open trades and withdraw the funds. Understanding and closely monitoring your equity is crucial for effective risk management and making informed trading decisions.
The fluctuations in equity serve as a real-time indicator of your trading performance and the overall health of your account. Maintaining a healthy equity balance is essential for weathering market volatility and capitalizing on future opportunities.
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When you have no trades open, your Equity calculation is straightforward:
Equity = Account Balance
Account Equity with No Open Trades
You deposit $1,000 into your forex trading account.
Calculating Account Equity
Step 1: Determine the Account Balance Your account balance is the $1,000 you deposited. Account Balance = $1,000 Step 2: Calculate the Account Equity Since you have no open trades, your Account Equity is equal to your Account Balance. Account Equity = Account Balance Account Equity = $1,000
In this scenario, your Account Equity is $1,000, which is the same as your Account Balance.
The key points are:
- You deposited $1,000 into your trading account.
- With no open positions, your Account Balance and Account Equity are the same.
- Account Equity = Account Balance = $1,000
This represents the total current value of your trading account, as there are no unrealized gains or losses from open trades to factor in.
The equity remains at $1,000 until you enter a trade, at which point the equity will start fluctuating based on the performance of your open position(s).
Calculating Equity with Open Positions
Open Position Scenario
Suppose you have the following in your forex trading account:
- Initial Deposit: $5,000
- Open Long Position on EUR/USD: 0.5 lots
- Unrealized Profit on EUR/USD Position: $200
Calculating Equity
Step 1: Determine the Account Balance Your initial deposit was $5,000, and you have not made any withdrawals or additional deposits, so your Account Balance is still $5,000. Account Balance = $5,000 Step 2: Calculate the Floating Profit/Loss Your open long position on EUR/USD has an unrealized profit of $200. Floating Profit = $200 Step 3: Calculate the Account Equity Equity = Account Balance + Floating Profit (or Loss) Equity = $5,000 + $200 = $5,200
In this scenario, your Account Equity is $5,200, which is the sum of your Account Balance ($5,000) and the unrealized profit of $200 from your open EUR/USD position.
Losing Trade Scenario
Suppose your open position on EUR/USD is now showing an unrealized loss of $150.
Calculating Equity
Equity = Account Balance + Floating Loss Equity = $5,000 + (-$150) = $4,850
In this case, your Account Equity would be $4,850, as the $150 unrealized loss is deducted from your Account Balance.
Winning Trade Scenario
Suppose your open position on EUR/USD is now showing an unrealized profit of $350.
Calculating Equity
Equity = Account Balance + Floating Profit Equity = $5,000 + $350 = $5,350
In this scenario, your Account Equity is $5,350, as the $350 unrealized profit is added to your Account Balance.
The key takeaway is that your Account Equity fluctuates based on the performance of your open positions, as the unrealized profits and losses are factored into the calculation. This represents the current value of your trading account, which may change as the market moves.
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