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Learning the difference between an account balance and equity

What is account equity?

Every trading account has a corresponding value. We refer to the most recent and current value as account equity, or just simply equity. Every time a tick happens, the screen displays a fluctuation in equity.

A tick is a price movement seen on the right side of the decimal point that a group them forms a point. They are the slightest possible change in price that a market measures.

If we add all the realized and unrealized profits and losses (P/L) of your open and active accounts, we will arrive with a sum that we call the equity. In short, equity is a reflection of your current trades’ rise and fall or fluctuations.

Calculating your account equity in different situations:

Let us cite several instances and the difference in calculation depending on the situation.

Let us start with equity calculation if you do not have any active trades at the moment.

Account equity= account balance

It means that if your account balance is $2,000 and you do not have any open trades right now, your account equity is also $2,000.

Now, how is the equity calculation if you have open trades at the moment

Account equity = account balance + unrealized profits and losses (P/L)

If your open trade is likely to lose:

 You have a $1,000 balance in your trading account. You went short on a EUR/ USD currency trade. However, prices go in the opposite direction that you want it to move. Now, you see an unrealized loss of $100. In this case, the equation of your account equity will go something like this:

Account equity = account balance + unrealized profits and losses (P/L)

$900= $1,000 + (-100)

Your account equity is equal to $900.

If your open trade is likely to win:

Now, you decide to go long on the EUR/ USD currency pair. Thankfully, this time, the prices move in your desired direction. As a result, you already see a $150 unrealized profit. Your account equity should go like this:

Account equity = account balance + unrealized profits and losses (P/L)

$1150= $1000 + $150

Your account equity is equal to $1150

Tell me more about account equity.

Unless you close your position, your unrealized P/L will remain as unrealized P/L. Also, this account equity will continue to go up and down with every tick. In short, we can say that this equity is just temporary. The only way to make this your real account balance and realized P/L is by closing your positions.

Are you confused between equity and balance?

If there is confusion between account and balance, let us run through these facts:

If you do not have open trades, the balance and equity are similar. The confusion begins when you have open trades, right? Here is a simple explanation:

  • Balance. You get all of these from closed positions.
  • Equity. You get them when you calculate all your real-time open and closed positions.

So, you can have a significant balance but small equity when you have a massive unrealized loss. For example, your account balance is $2,000, but you have an open trade with a $1500 unrealized loss. Your account equity is $500.

Account equity = account balance + unrealized loss

$500 = $2000 + $1500

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