Over the years of communicating with users of my Expert Advisors, I have noticed the same mistake time and time again, especially among beginners.
Many traders pay close attention to their account balance, celebrating every increase or worrying about every decrease, while paying very little attention to Equity.
In reality, Equity is what tells you what is actually happening to your trading account at this very moment. Moreover, it is this value that your broker uses when calculating risk levels, Margin Call, and Stop Out.
Before discussing profits, drawdowns, or the safety of any trading strategy, it is important to understand the difference between Balance and Equity, and why experienced traders primarily monitor Equity.
What Is Balance?
Balance is the result of your closed trades.
It does not include the profit or loss of your currently open positions, even though those positions are actively participating in the market.
As long as a position remains open, any change in its floating profit or loss has no effect on your Balance.
Therefore, Balance only reflects the history of your completed trades.
What Is Equity?
Equity represents the current state of your trading account, taking into account the profit or loss of all open positions.
Simply put, if you were to close all of your open trades at the current market prices, the remaining amount in your account would be your Equity.
In simplified form:
Equity = Balance + Floating Profit − Floating Loss
If there are no open positions, Balance and Equity are identical.
However, once trades are opened, Equity changes continuously with the market, while Balance remains unchanged until those positions are closed.
A Simple Example
Suppose:
- Balance = $10,000
- Floating loss = $3,500
In this case:
- Equity = $6,500
Although your Balance still shows $10,000, the actual current value of your trading account is only $6,500 because of the open positions. This is the amount that determines your account's safety margin.
Why Equity Is the Most Important Indicator
Equity is used to calculate:
- Free Margin;
- Margin Level;
- Margin Call;
- Stop Out.
In other words, your broker monitors Equity—not Balance.
For this reason, traders should also evaluate the condition of their trading accounts primarily by looking at Equity.
Why This Matters Even More When Positions Are Open
The longer positions remain open, the greater the difference between Balance and Equity can become.
This applies to many trading approaches, including manual trading, long-term position trading, grid strategies, averaging strategies, and many others.
The difference itself is not a problem. However, Equity is the indicator that accurately reflects the current condition of your trading account and allows you to assess the actual level of risk.
Conclusion
Balance represents the past—it reflects the outcome of trades that have already been closed.
Equity represents the present—it reflects the current condition of your account, including all open positions.
That is why experienced traders base their decisions primarily on Equity. It allows them to recognize changes in risk early and determine when a trading strategy needs to be adjusted. If an Expert Advisor is being used, it is important that it provides the technical ability to modify trading parameters in response to changing market conditions.
