Equity (in Trading)
The total value of your trading account, calculated as the sum of your account balance and any unrealized profits or losses from open positions. Basically, it’s the sum total of what you own in your trading account.
What Is Equity?
Equity is the total value of your trading account, including your balance and the profit or loss from your open trades. If you don’t have any open trades, it’s just your balance. It shows how much your account is worth in real time and indicates how much money you have to trade.
How Equity Is Calculated
Equity = Account Balance + Unrealized Profits − Unrealized Losses
Key Features of Equity
- Always Changing: Your equity updates constantly based on the performance of your open trades.
- Includes Open Trades: It factors in both your account balance and any profits or losses from active positions.
- Risk Alert: If your equity drops too low in a leveraged account, you might face a margin call or liquidation.
Examples
- No Open Trades: If your account balance is $10,000 and you have no trades, your equity is $10,000.
- With Open Trades:
- If you have an open trade with a $500 profit, your equity is $10,500.
- If your open trade shows a $300 loss, your equity drops to $9,700.
- If you have an open trade with a $500 profit, and another open trade with a $300 loss, your equity is $10,200. Remember that the value of open trades can change over time.
Why Equity Is Important
- Available Trading Capital i.e. Trading Power: Your equity determines how much you can trade.
- Margin Impact: It’s used to calculate your margin level and decide if you can keep trades open or start new ones.
- Success Tracker/Performance Indicator: A growing equity means you’re doing well, while a shrinking equity warns of potential issues.
In Short, Equity is your account’s real-time value, combining your balance with the profit or loss from your active trades. It’s an essential tool for tracking your account health, managing risks, and measuring your trading success.