Balance Versus Equity: Which Number Are You Really Trading With?

[Fairman]

Balance Versus Equity: Which Number Are You Really Trading With?

Scenario: a trader sees a balance of 10,000 dollars. Two positions are open. One shows a floating profit of 300 dollars, and the other shows a floating loss of 800 dollars. What is the equity, and why does the difference matter?

Work it out. Balance reflects only closed trades, deposits, and withdrawals. Equity is the balance plus the sum of floating profits and losses. So equity equals 10,000 plus 300 minus 800, which is 9,500 dollars.

Margin level, free margin, and stop-out calculations all use equity, not balance. A trader looking only at balance would think they have 10,000 dollars of cushion, when the platform is calculating with 9,500.

Equity also matters for risk sizing. If your risk rule is 1 percent of equity, the right figure is 95 dollars, not 100. In prop firm evaluations, drawdown rules often use equity as well, so floating losses count even before you close.

There is another subtlety. A trade in floating profit raises equity, but the profit is not secured. A stop moved to breakeven locks it in. Until then, an adverse reversal can erase it.

Many traders feel richer when the floating profit shows up, and larger positions follow. This is a common source of overtrading and giving back gains.

Takeaway: base your sizing and your margin planning on equity, and treat floating profit as provisional.

Practical step: find the equity and balance fields on your platform, and watch how they differ during a trade.