Equity vs Power Balance: Why Equity is more important in Forex

Are you also a novice who gets confused between account balance & equity? Learn the key concept of equity versus power balance & find out which is crucial.

The foreign exchange market is full of confusing terminologies that look similar but are not. Account balance and equity are some basic terms that confuse a new trader a lot. Many traders think these two as the same, but no, they are completely different.

Being a reputable broker, Beirman Capital has many clients who don’t even understand the key difference between these terms. So, in this article, we will have a detailed study of equity versus power balance and why equity is considered more important for traders.

Understanding the Concept of Account Balance and Equity

For trading in the forex market, a trader needs to open an account with a broker platform popularly known as a forex trading account. An account balance is defined as the trading fund in the account plus profit or loss from closed positions. It does not include margin profit or loss from open position.

Meanwhile, account equity refers to the account balance plus profit or loss from closed and open positions. In the forex market, traders trade using leverage and margin facilities. Thus, considering the current profit or loss became important for traders.

Let us understand equity versus power balance with an example. Suppose a trader has an account balance of $5000 and the overall profit from the closed position is $1000. Currently trader has two open trades; one is running in profit of $1500, and one is running in a loss of $500. Here is the account balance and equity calculator in this case:

Account Balance = Fund in the account + Profit or Loss from closed position

= $5000 + $1000

= $6000

Equity = Account Balance + Profit or Loss from opened position

= $6000 + ($1500-$500)

= $7000

In the above case, the trader’s profit is good, so the equity is also high. But equity can also become negative if the loss is more.

Equity vs Power Balance: Which is more important

Equity and Account balance are both crucial terms. However, when it comes to forex trading, considering the returns from the ongoing trade is necessary. Here is why many professional and advanced traders give priority to equity over account balance:

Leverage Calculations:

Leverage is a borrowed fund that allows traders to hold large trades even with a small capital. Many forex traders use high leverage to maximize their returns. However, leverage can even blow up your trading account. By monitoring equity, traders can analyze how much leverage they can use.

Margin and Margin Call Management:

Margin can be defined as collateral or initial funds that are required to open a position in forex. As we study above, equity considers the profit or loss from open positions. So, traders can calculate the free margin through equity and find out how many more trades they can place.

Margin call occurs when the traders’ capital falls below a certain required level. Generally, a broker will send you a notification or alert before the margin call. The broker may end up forcing your trade position in case of a margin call. So, ignoring these notifications may result in blowing up your account and even waiting for the alert is also not good. So traders can keep a watch on equity and avoid the possibility of margin calls.

Plan your Trades:

Equity provides proper insight into tradeable capital. You can search for new opportunities considering the current equity. Traders can get key insights regarding capital to use per trade, stop loss and take profit levels, trade numbers, and leverage ratios. It will help in planning and managing their trade efficiently. Also, the probability of informed decisions is higher as your trades align with your capital.

Risk Management:

Risk is the key element to consider when planning your trades. And knowledge of your account equity will help you to do that efficiently. Traders can select the ideal risk-per-trade and risk-to-reward ratio by keeping a watch on equity.

Managing overnight charges:

A forex trader needs to pay swap charges for holding trades overnight. The swap fees make a significant amount when the duration for holding trade is long. Equity also takes broker commissions and swap amounts into consideration. So, by watching, equity traders can manage their overnight fees.

Manage Positions & Analyze Performance:

Many traders have numerous open trade positions. Traders can adjust the stop loss level and risk or take profit by watching trades. In addition, they can watch the equity changes. It will help them in customizing the strategies and trade time frame accordingly.

Keep a stable mindset:

Many traders avoid watching the equity. However a sudden market upturn can make a big difference to the capital. In such cases, it became difficult to keep a calm mindset.

However, when you keep an eye on equity, you know what is going on in the market. So you will get an early update and be prepared for the unfavourable outcome. You can even take safety measures to deal with such trade scenarios.

Conclusion

Undoubtedly, equity is more important when we talk about equity versus power balance. Monitoring equity results in informed decision-making, proper risk management, strategy optimization, position sizing, and leverage management.

However, you cannot stick to your chart and watch account equity 24/7. Thus, to help our clients, Beirman Capital provide timely account alerts. This will help traders in planning, organizing and adjusting their trades and maximize the overall results. Open an account with us and take advantage of amazing benefits for a smooth trading journey..

FAQs

What is equity in forex?

Equity refers to the account balance plus profit or loss from closed and open positions.

What is the account balance in forex?

An account balance is defined as the trading fund in the account plus profit or loss from closed positions.

Can account equity become negative in forex?

Yes, account equity can become negative in forex during excessive losses.

Equity versus account balance which is more important for forex traders?

Equity and Account balance both are crucial terms. However equity considers the profit or loss from the ongoing trade, so it became more important for forex traders.