What Is Equity in Forex and Its Importance in Trading?
Understanding equity and its relation to profit and loss in forex trading is essential for investors.

Published November 22, 2023.

Successful forex traders generally understand the role equity plays in their trades. A trader’s account equity, trading balance, margins, and leverage are interconnected, and knowing how they interact is crucial to earning profits.
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Definition of Equity in Forex
Equity is the total value of a trading account. This includes the account balance, unrealized profits, or losses from all currently open positions.
For example:
A trader with a $5,000 account balance opens a position on a currency pair that moves favorably, earning a profit of $50. The account equity will then be $5,050. Equity considers all open positions, so if the currency pair led to a loss of the same amount, $50, the equity would then be $4,950.
The Relationship between Equity and Margin
Margins are the funds you put up to open positions and use leverage. The funds in the account balance not tied up in open positions are known as a free margin. Account equity is the sum of your free margin and the gains or losses from margins in open positions.
» Understanding the terminology is crucial: Basic forex terms
Equity as a Risk Management Tool
Smart traders will know how to analyse trades that increase their account equity. It is a handy metric to set stop-loss and take-profit orders on open positions. Maintaining a positive equity level means the net profits from all open positions outweigh the net losses.
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