What is forex equity? How to manage the equity in forex effectively?

EducationNovember 17, 2021

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What is forex equity? When trading forex, the trader often sees the term Equity. This is a common and important term in forex trading. If you want to trade well, the trader needs to know how to manage capital. Moreover, to do that, traders have to understand: What is Equity? How to Use the Equity in forex effectively? We will learn about this information in the article below.

What is Forex Equity?

Equity in forex is the total value of a forex trading account.

When there is an open position, the account equity is the total value, including balance and profit (or loss). Then, Equity will not be fixed but depends on the profit/loss of the open orders.

Equity = Balance + Unrealized Profit/Loss

What is Forex Equity? What does Equity mean in forex accounts? How to manage Equity effectively? Equity is total balance and profit or loss

Relationship between Equity and Balance

When there is no active position, the unrealized profit/loss is then zero. Thus, Equity equals forex account balance.
When there is an active position, the Equity will be greater than the balance if trades are profitable.
Conversely, when an open position is at a loss, Equity will be less than balanced.

E.g.: Deposit 500$ into forex account. Then, Balance = Equity = $500. Trader opens a position BUY EUR/USD:

  • If position is -$10 loss, Equity is $490.
  • If position is $5 profit, Equity is $505.

* See more: The complete guide XM from a to z

What does Equity mean in forex accounts?

Equity represents real-time account value, so it reflects how well the account is doing. When Equity is more significant than balance, traders are trading well. On the contrary, when Equity is minor than balance, it means traders need to guard against risks for the account.

Equity has a direct effect on Margin call and other concepts in forex account as follows:

What is Forex Equity? What does Equity mean in forex accounts? How to manage Equity effectively? Equity is total balance and profit or loss

Equity affects Free Margin. When there is an open position on the account, the system will show a Free margin. Free Margin is capital to open new orders.

Free Margin = Equity – Used Margin

Equity also affects the margin ratio.

Margin Level = (Equity/Used Margin)*100%

When the Equity equals the Used Margin, Free Margin is zero, and the Margin Level will be 100%. At this time, the trader cannot open any new orders.

If the Margin Level is below 100%, a margin call may ask the trader to add more funds to the account or close the losing trades. Suppose the trader does not fulfill either of the above two requirements. In that case, the trade continues to lose. The Margin Level continues to decrease (usually at 30%), the broker can automatically close all open trades (Stop out).

How to manage Equity in forex effectively?

Good equity management helps forex accounts increase profits and avoid margin calls and stop-outs. Traders need to maintain good Equity by improving unrealized profit/loss.

Open positions will have unrealized profit/loss and directly affect Equity. With open positions, profit or loss is only temporary, not an exact outcome. Because when the price moves, this profit and loss will also change. The orders that are making a profit may become a loss and vice versa.

As a result, many new traders often do not want to stop their losing positions. They hope that over time, the market will reverse, and their trade will be profitable. In contrast to good orders, new traders often take profits early for fear of losing those profits.

There are also cases where traders quickly close their positions when they have just lost, or they try to maintain profitable positions in the hope of bringing in more profits.

However, traders should build a disciplined investment strategy when trading forex instead of acting on emotions for profitable long-term trading. When taking a position, traders need to determine the levels of stop-loss, take profit. Trading with a strategy will help trader Equity to manage efficiently and in good working order.

Conclusion

So, the above article has understanding: What is Equity? Equity is a necessary term that helps traders to have reasonable control over account balance. Once traders understand this and related terms well, they will know how to build the right trading strategies and manage trading capital effectively, without losing too much or taking profits too soon.

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