Difference equity and balance

A question that many pose is what is the difference between equity and balance.

Both concepts are important, but sometimes they are thought to be one and the same, which is not the case. The trading account balance refers to the amount of money that a trader has in his account at the time. This does not include opened positions. Hence the balance will reflect the profit or loss that has been attained from the closed positions only. It is important to bear in mins that neither the open positions nor the margin are included in the balance.

Equity, on the other hand, includes the total result of the trading operations as well as the balance at that point in time.
Equity = the balance, added to the current result of the opened positions and the swap. The broker’s commission will be deducted from this.

Hence, the equity could end up being lower than the balance if there are existing trades currently losing, as well as in cases when the profit made from trades is not able to compensate for the swap or the commission.

On the other hand, the equity would be higher than the balance if the profit made from existing trades is higher than the swap and the commission.

Therefore, the main difference between the balance and the equity is that the balance will not include opened positions, whereas the equity includes all current changes taking place. As a result, we can conclude that the equity is a floating value.

Most traders monitor equity closely since it offers important information. In fact if the margin is subtracted from equity, one will be able to calculate the free margin, which is commonly used to enter new trades.