Balance and equity are the important terminologies of forex trading. Initially, when we open a forex account with any broker, we have no balance in our account. Therefore, we cannot participate in forex trading. We must deposit some amount into this account. Then we will able to book our trade and can earn profit from the foreign exchange market.
What is Balance in Forex?
The Balance is the amount of capital you have in your account either deposited it for the first time or after closed all opened trades. If you have an opened trades in your account, balance is not fluctuating by moving up and down the market value. The profit of your open order will be added to your account and loss will be deducted from your account right after the closing of your partial or all trades.
For example, your current balance amount is 1000, could be ($1000, £1000 or €1000). Let’s we deposited $1000 into our forex account and quoted a trade of 1 standard lot on EUR/USD. It will change the Balance. Now, after some time the market will move up or down. If it is closed at a $100 profit your new Balance would be $1100. And if it is closed with a loss of $100 then your new Balance would be $900.
What is Equity in Forex?
The equity is the amount that comes from adding profit or subtracting loss of the active trade into/from the balance. If you have not any active trade then our equity will be the same as our balance.
When we open a trade our equity will fluctuate according to our profit/loss, but our balance will remain constant. We calculate equity with the below formula,
Equity= Balance + Active Trade Profit or
Equity= Balance – Active Trade Loss
For example, we have a$80.86 balance in our account. And we have a EUR/USD active trade showing a -$48.88 loss. It can be calculated as,
Equity = $80.86 – $48.88
Equity = $31.98