What is Equity in MT4? Distinguish Equity from Balance
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The term equity will probably not be too strange for forex investors because you will always see it every time you trade on a trading platform like MT4. However, for new investors, the concept of Equity is still quite vague, and it is impossible to distinguish it from the Balance of the account. This article explains what Equity is, how Equity is calculated, and how it relates to other concepts.
What is Equity on MT4?
On the MT4 software, Equity appears along with several other concepts at the Terminal window, the Trade tab, where investors will monitor the current account situation and open trading orders.
Equity is the current value of the trading account. When there is an open order, Equity is the sum of the account balance plus the profit/loss of the available orders. Therefore, Equity will not be fixed but constantly changing.
How to calculate Equity:
Equity = Balance + Profit/loss of open positions
What is the difference between Equity and Balance?
The most significant difference between Balance and Equity is that the Balance will be fixed during the time when trading orders are opened. Equity is constantly changing.
Balance is the amount of money available in the trading account. When opening a new account, Balance is the amount of money deposited into the account for the first time. The value of Balance only changes until the investor closes all orders, then the Balance will be updated by adding/subtracting the profit/loss.
Example: You deposit 500$ into your forex account. Then, Balance = Equity = $500. Then you open 1 Buy EUR/USD trade:
- If that trade is losing $10: Equity = $490; Balance = 500$
- If that trade is making $5, Equity = $505; Balance = 500$
- If you decide to close the order at a profit of $8, then Balance = $508.
Therefore, it can be understood:
When there is no active position, the profit/loss is zero. Hence, Equity = Balance.
When there is an active position, if your trades are profitable, Equity will be greater than Balance. Conversely, Equity will be less than Balance when the open position is at a loss.
It is easy for new traders to confuse these two concepts with each other, often with a typical mentality:
Look at the Balance when the account is negative in the hope to squeeze the loss until the Equity is equal to the Balance and then close the order.
Or look at Equity when the account is profitable and expect the account to continue to grow even more.
Therefore, clearly distinguishing Equity and Balance will help you avoid mistakes that affect your trading psychology and trading results.
What does Equity mean in the MT4 forex account?
Equity represents real-time account value, reflecting how well your account is doing. When Equity is greater than Balance, you are trading well. On the contrary, when Equity is less than Balance, it means you need to guard against risks for your account.
Equity has a direct effect on Margin call and other concepts in your forex account as follows:
- Equity affects Free Margin. When there is an open position on your account, based on Equity, the system will show the remaining Balance in the account that can be used to open a new order. That Balance is called Free Margin.
Free Margin = Equity – Used Margin
- Equity also affects the margin ratio.
Margin Level = (Equity/Used Margin)*100%
When the Equity equals the used Margin, the Balance to open the account is zero, and the Margin will be 100%. You cannot open any new orders at this time.
If the Margin is below 100%, a margin call may appear asking you to add more funds to your account or close losing trades. Suppose either of the above requirements is not fulfilled. In that case, the trade continues to lose. The margin ratio continues to decrease (usually at 30%), the broker can automatically close all your open trades. This situation is called Stop out.
In short, understanding the basics is one of the first steps in getting into the forex market. This is extremely important because it will help you avoid unnecessary mistakes in the trading process. In the following article, we will help you clarify other concepts. Good luck with your trading!
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