In this article, let’s look at these important forex terms and their interrelationships.
Balance
Equity
Free Margin
Balance
Balance is the financial outcome of all completed transactions including deposit/withdrawal operations on a trading account.
Let us look at an example:
You open a trading account and deposit USD 500 into it. This is your starting balance.
You trade and close two orders - one with a profit of USD 100 and the other with a loss of USD 50.
Your balance = 500 + 100 - 50 = USD 550.
Note: It is possible to have a negative balance if you close an order in which the loss is higher than the balance while there are other open orders with profit.
Equity
Equity is a figure which denotes the results (profit/loss) of all the open orders, i.e. reflects the amount of funds that will remain in the account if the trader closes all the open orders at the moment.
Equity = Balance + Floating Profit + Swaps
Equity = Balance - Floating Loss + Swaps
Equity = Margin + Free Margin
Let us look at an example:
You open a trading account and deposit USD 500 into it. This is your starting balance. Before you start trading, your equity is the same as your balance.
You start to trade and open a trade that makes a profit of USD 100. There are no swap charges at the moment.
Your equity = 500 + 100 = USD 600.
It is worth mentioning that in the above instance, your balance will remain USD 500 as long as the trade is open.
Free Margin
Free margin is the amount of funds that have not been used as margin for open positions. It is the amount of funds in your account which can either be withdrawn or used to open new positions.
Free Margin = Equity - Margin
Let us look at an example:
You have a trading account with USD 1000 in it.
You open a few positions which will require a margin of USD 200. The total profit made by these positions once opened is USD 300.
Your balance = USD 1000.
Your equity = 1000 + 300 = USD 1300.
Your free margin = equity - margin = 1300 - 200 = USD 1100.
Note: A good risk management strategy is to always maintain sufficient free margin to avoid margin call and stop out.
