What a Smooth Balance Curve Can Leave Out

By Cree Lawson

A backtest chart rises in small, steady steps. There are very few dips. Before deciding that the EA had an easy ride, I want to know which line I'm looking at.

Balance and equity describe different parts of an account. Balance records closed results and other booked account changes. Equity also reflects the current value of open positions. When positions are losing, those lines can move apart.

Here's an illustrative example with no deposits or withdrawals. An account has a $10,000 balance and open positions showing a combined $2,000 loss. Its equity is approximately $8,000, subject to the account's accounting details. If those positions recover and eventually close for a $100 gain, the balance can step up to $10,100.

The account still had to carry the earlier floating loss. A chart of balance alone would give an incomplete picture of that experience.

Look for the difficult part of the journey

I would begin by displaying both lines and finding the largest gaps between them. Then I would inspect the positions held during those periods.

How many positions were open? Were they exposed to the same move? Did the EA add to them? How much margin was being used? How long did it take for equity to return to its previous high?

The answers help explain the chart. They also help distinguish a brief fluctuation from a long period when the account remained under pressure.

The MT5 report documentation distinguishes balance drawdown from equity drawdown. Keep the label attached whenever you quote either number.

Check the observation frequency

A daily equity series records the account at particular times. It can miss a deeper loss that occurred and recovered between those observations. A chart therefore needs a description of how its values were sampled.

That doesn't make daily data useless. It tells you which questions the data can answer. When assessing intraday exposure, I would ask for observations that actually capture it.

I would also check what happened at the end of the test. Were open positions closed by the testing process, valued at the boundary, or handled some other way? The answer belongs with the result, especially when the EA holds positions for a long time.

Use the curve to choose your next question

A smooth balance line doesn't establish wrongdoing or a hidden problem. It is a reason to open the equity record and understand the position management behind it.

My review note would include the largest observed equity drawdown, the measurement frequency, the longest recovery period and the exposure during the worst interval. I would keep any data gaps beside those observations.

The final profit tells me where the test ended. The equity record helps me understand what happened before it got there.

Educational discussion. The account example is hypothetical. Historical drawdown is an observation, not a maximum loss guarantee.