Equity VS Balance: What Is the Difference?
Equity and balance are two important concepts in trading. It’s crucial to differentiate between them because they can affect your trading decisions and risk management strategies. Learn more about equity and balance to make informed trading decisions and manage your risk effectively.
Definitions
The balance of a trading account is the sum of money that has been deposited into the account. It reflects the account’s overall value at a particular moment, including any prior profits or losses.
If you deposit $10,000 into your trading account, your balance will show $10,000.
Equity refers to the present worth of your trading account, considering any ongoing trades. It is determined by adding the balance to the unrealized profits or losses from open trades.
Suppose you have a balance of $10,000 and your open trades have a total unrealized profit of $1,000, then your equity will be $11,000.
Comparison
To put it simply, balance refers to the amount of money you have in your trading account, while equity reflects the value of your trading account at any given moment, considering any open trades.
Equity is subject to fluctuations, depending on the performance of your open trades, while the balance remains steady unless you make any deposits or withdrawals from your account.
For instance, if you have open trades that are in a loss position, your equity would be lower than your balance, which can impact your available margin and increase the risk of a margin call.
Equity VS balance: how to calculate the risks?
When you know your equity and balance, you should also remember the required margin for your trades. To trade profitably and safely, follow these steps to manage your funds:
1. Determine your risk tolerance. It dictates the highest amount of money you are comfortable losing per trade.
For instance, if you have a $10,000 trading account and are willing to risk 2% of your account for each trade, your maximum potential loss per trade would be $200.
2. Calculate your position size to determine the number of contracts or lots that you will be trading. Divide your maximum risk per trade by your stop-loss distance.
If you trading a currency pair with a 50-pip stop-loss and your maximum risk per trade is $200, your position size would be calculated accordingly:
Position size = maximum risk per trade / stop-loss distance
Position size = $200 / 50 pips
Position size = $4 per pip
In this example, your position size would be $4 per pip.
3. Your margin requirement is the amount of money you need to have in your trading account to cover your position. To calculate your margin requirement, you need to multiply your position size by the margin percentage required by your broker.
If a broker requires a margin of 1%, your margin requirement would be:
Margin requirement = position size * margin percentage
Margin requirement = $4 per pip * 1%
Margin requirement = $40
In this example, your margin requirement would be $40.
Learn more about margin level and margin call as explained by the Headway experts.
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