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. Also, to do this, traders need to understand: what is equity? How to use equity in forex effectively? We will learn this information in the following article.
What is Forex Equity?
Equity in forex is the total value of a forex trading account.
When there is an open position, the account capital is the total value, including balance and profit (or loss). So, the equity will not be fixed but depends on the profit/loss of the open orders.
Equity = Balance + Unrealized Profit/Loss
Relationship between equity and balance
When there is no active position, the unrealized profit/loss is therefore zero. Therefore, Equity equals the forex.
When there is an active position, the Equity will be greater than the balance if the trades are profitable.
Conversely, when an open position is at a loss, the equity will be less than balanced.
For example: deposit $500 into your forex account. So, Balance = Equity = $500. The trader opens a BUY EUR/USD position:
- If the position is -$10 loss, the equity is $490.
- If the position is $5 profit, the equity is $505.
What does Equity mean in forex accounts?
Capital represents the value of the account in real time, so it reflects how well the account is doing. When equity is more significant than balance, traders trade well. Conversely, when equity is less than the balance, it means that traders need to protect themselves from risks to the account.
Equity has a direct effect on margin demand and other concepts in the forex account as follows:
Net worth affects free margin. When there is an open position on the account, the system will show a free margin. Free margin is the capital to open new orders.
Free Margin = Equity – Margin Used
Net worth also affects the margin ratio.
Margin level = (Equity/Margin used)*100%
When the net worth is equal to the margin used, the free margin is zero and the margin level will be 100%. At the moment, the trader cannot open new orders.
If the margin level is less than 100%, a margin call can ask the trader to add more funds to the account or close the losing trades. Suppose the trader does not meet either of the two above 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 stock management helps forex accounts increase profits and avoid margin calls and stop-outs. Traders need to maintain good equity by improving unrealized profits/losses.
Open positions will have unrealized profits/losses and will directly affect equity. With open positions, the profit or loss is only temporary, not an exact result. Because when the price moves, this profit and loss will also change. Orders that are making a profit can 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. Unlike good orders, new traders often take profits upfront for fear of losing those profits.
There are also instances when traders quickly close their positions when they have just lost, or try to hold profitable positions in the hope of bringing 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 stop-loss, take profit levels. Trading with a strategy will help the Equity trader to manage efficiently and in good condition.
So, the above article has understanding: What is equity? Fairness is a necessary term that helps traders have reasonable control over their account balance. Once traders understand this and the 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.