Beginners may confuse forex balance and equity when they first see the terms in a platform. Here's a clear explanation of the differences and which one is more important to keep track of.

The forex balance is defined as the amount of money that is available in the trading account of a trader at any point in time. However, this balance does not cover any profits earned or losses incurred by the trader on open positions. This is because the forex balance only shows the profit/loss from closed positions.

Forex Balance vs Equity

Meanwhile, equity refers to the total result of all trading operations and forex balance at a particular point. It is the balance plus/minus the profits/losses from all trading positions, including the floating ones. The formula below reflects the concept of equity:

Equity = balance + latest outcome of the open trading positions + swap – broker's commission

So, the major difference between forex balance and equity is that open positions are not considered a part of forex balance. In contrast, all current changes in trading positions are a part of equity. This means that equity is a floating value that is susceptible to changes at varying times.

If a trader does not have any open trading positions, the equity is equal to the forex balance. There are two situations in which the equity can be lower than the forex balance:

  1. The profit earned from trades is unable to compensate for the broker's commission or swap.
  2. Open trading positions are currently experiencing losses.

There is also a situation in which the equity can be higher than the forex balance. In such a case, the profit from existing positions must exceed the swap and broker's commission.

On MetaTrader 4, the "Trade" and "Exposure" tabs display the forex balance and equity. While it is essential to know what the forex balance is, it is even more crucial to watch the equity value and constantly track it.


Why Traders Should Track their Equity

Let us start by examining another definition of equity. Equity can also be defined as the sum of a trader's forex balance and all unrealized profits/losses related to their open positions. Equity shows the prevailing condition of all opened trading positions.

If the margin is deducted from the equity, the trader will arrive at a value for free margin. This free margin can then be used to initiate new trading positions. However, if the free margin is not sufficient enough to keep the trading positions open, then there will be a notification from the broker. The notification will inform the trader to top up their balance. Failing to act on this notification will lead to the broker forcibly closing all the trader's open positions if the market moves against them.

The notification sent out by brokers for traders to top up their accounts is known as Margin Call. The scenario in which the broker forcibly closes a trader's open positions due to a lack of sufficient assets is known as Stop Out. Brokers have varying limits for margin call and stop out. These are usually described in the specifications for a forex account.

As a trader, it is important to track your equity and free margin level so that you do not end up losing your trading deposit.


Forex Balance Vs Equity, Which One is More Important?

It is clear that there is a significant difference between equity and balance. Also, we now know which one is more important to watch closely. Failing to pay attention to your equity will only affect your trading efficiency and the potential to generate profits due to the crucial factors it encompasses. Whereas, the balance does not include anything significant enough to affect the outcomes of trades.

The effectiveness of your trading strategy and risk management principles along with your money management will determine the direction of your equity. It will also affect the number of trades you can place with the funds displayed in your forex balance. This is why you cannot afford to trade carelessly or be haphazard in your trading approach because that will only draw your account closer to the stop-out level. Once it reaches that level, your equity will not be able to support further trading operations and your forex balance becomes zero.


By now, I am sure you know the importance of paying attention to your forex balance and equity. While they are both different, it is important to keep an eye on both, especially the equity to give yourself a chance at successful trading.