About Lesson
In Forex trading, your balance refers to the total amount of money in your trading account at a given point in time, excluding any open positions. It reflects the initial deposit, plus or minus any profits or losses from closed trades.
The balance does not include any unrealized profits or losses from open positions—those are considered separately as part of your equity.
How Balance Relates to Equity and Margin
- Balance: The amount of money in your account after all closed trades have been settled. It doesn’t reflect the value of open trades.
- Equity: The total value of your account, including both the balance and any unrealized profits or losses from open trades.
- Formula: Equity=Balance+Unrealized Profit/Losstext{Equity} = text{Balance} + text{Unrealized Profit/Loss}
- Used Margin: The amount of margin currently tied up in open positions.
- Free Margin: The portion of your balance that is not being used for margin and is available for opening new positions.
Example: Balance, Equity, and Margin
Scenario 1: No Open Positions
- Balance: $5,000
- Equity: $5,000 (since there are no open positions, balance = equity)
- Used Margin: $0
- Free Margin: $5,000 (full balance is free)
Scenario 2: Open Position with Unrealized Loss
- Balance: $5,000
- Unrealized Loss: -$500 (from an open trade)
- Equity: $4,500 (balance – unrealized loss)
- Used Margin: $1,000 (margin required to hold the open position)
- Free Margin: $3,500 (equity – used margin)
In this case, the balance remains at $5,000, but the equity is affected by the unrealized loss from the open position. If the position closes at a loss, the balance will decrease accordingly.
Key Points About Balance in Forex
- Fixed Amount After Trade Closure:
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- Your balance only changes when you close a trade, realize a profit, or take a loss. Open positions don’t affect your balance until they are closed.
- Difference from Equity:
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- While balance reflects only the settled funds, equity includes both settled and unsettled amounts (including unrealized profits/losses).
- Leverage Impact:
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- Leverage can affect your ability to control larger positions, but your balance will only change based on realized gains or losses from closed trades.
- Not Affected by Margin:
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- Your balance doesn’t change because of margin requirements or the use of leverage, as these are separate calculations. Only the equity will reflect the impact of margin.
Summary
- Balance is the total amount of funds in your Forex trading account after all closed trades.
- Equity is the total value of your account, including both the balance and unrealized profits or losses from open positions.
- Margin and leverage do not affect your balance, but they influence your ability to open larger positions and impact your equity.
