What is Equity in Forex?
In forex trading, the equity term refers to the overall value of a trader’s account after all open positions in the equation have been factored in. If the trader has active trading positions, the leverage on the forex account is essentially the amount of the margin from the forex account plus the free or available margin, which is referred to as leverage. The equity is the same as the free margin when there are no active trading positions, which is also the same as the balance on the portfolio.
When trading forex, determining how much money you have at your disposal is a complex procedure. At any given moment, one must understand one ‘s opening balance, one’s open positions, and their profit/loss status. Given that these positions are typically leveraged, the amount of leverage must be taken into account in profit and loss. Loss may also take the derivatives and roll-over payments into account. Simply put, balance is the amount of money one has when there are no open positions in one’s own account. Equity is one’s balance plus / minus profit/loss on debt.
Foreign currency market trading poses a fast-paced challenge for speculators. The market remains open around the clock, five days a week, and allows you to create several broad positions using margin. A small amount of cash will open up a big contract in the forex market, which means high risks and potentially high rewards. Until dipping into currencies ensure that you understand clearly the difference between account balance and account equity.
The account equity consists of the cash balance plus the value of open positions (positive or negative). If the open positions of a trader lose serious value, his equity will fall below a “margin maintenance level,” meaning that the Forex Broker will either need more cash or close the losing position automatically to avoid more loss. A standard margin level of the opening balance maybe 10 percent. For example, a contract or combination of contracts that lose 91 percent of the balance will cause a broker’s margin call or close of a position.
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