What is Equity in Forex? – FX Guide

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Over the years, the forex market has grown exponentially. As a result, more people in Kenya are becoming interested in it. Even though Forex has been around for a couple of decades, it only gained popularity at the turn of the century. As forex brokers increase in popularity, more traders can get involved in the seemingly lucrative financial industry.

For a better understanding of Forex, you must understand the key concepts behind it. By doing so, you will be able to trade effectively.

The concept of equity is crucial to understanding forex while trading in Kenya. By understanding it, you will be able to make smart decisions to save money. So, if you want to know, What is equity in Forex? Let’s look at its concepts in more detail.

Understanding Equity in Forex

The equity of a trading account is the total of the balance and all the open positions. Floating open positions represent profits or losses that affect your equity and may significantly affect the value of your account.

Because forex signals and economics are constantly changing, your equity is bound to fluctuate while you have open positions. Therefore, you increase your equity when you earn profits on your open positions.

The value of your equity decreases when losses are realised on any open positions. Therefore, the equity of your trading account equals the balance in your trading account when you have no open trades.

To become proficient in Equity in Forex, it is necessary to be conversant with other terminology used in the industry. For example, an equity balance refers to all cash in your account without any open trades. Open trade in floating equity refers to funds that have not yet been settled.

Another term without which you should be aware and should also stay away from is negative equity. This is because when losses occur in open trades, the account balance is wiped clean by negative equity.

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Before beginning your forex trading journey, you should consider the following things in addition to equity.

Have a trading plan

The importance of developing a trading strategy cannot be overstated. If you cultivate discipline through a trading plan, you can remain objective. Therefore, it is important to include your opening and closing trades in your trading plan. In addition, your trading plan should describe the steps you will take if you lose a trade.

Protecting your capital

Profit is the ultimate goal of any trader. Unfortunately, traders often incur losses along the way. Taking proper risk management into account is highly recommended since losses are part of trading. You can mitigate forex losses by setting stop losses and sizing your positions.

Why is equity important to learn?

Forex equity can take two forms. Either it represents the current balance of your account, or it represents the value of your account in the future. Your equity is equal to your balance when you don’t have any trades open. When you have an active trade, however, the whole process becomes more complex.

Consider the case of an open USD/JPY trade. Currently, the terminal reports a profit of 500 Euros. The impact on equity would be immediate. The balance will reflect the same amount when the trade was opened, but the equity will reflect the adjusted amount.

Take the example that you had $1000 at the start of the trade, and you are now in a profit of $500 (not bad). FX equity would be $1500, but your account balance would still be $1000. For the system to understand if a trade may be closed at any time and increase your balance, it does a calculation before you close the trade.

Your equity will remain unchanged once the trade is closed and the account balance is $1500. In the next step, you will see an increased balance but no open positions, so the balance will equal the equity.

Kenyan traders can hold several kinds of equities, including

  • Availability equity
  • Negative Equity
  • Positive Equity

In what other ways is equity referred to as Forex?

Margins are typically associated with equity, which is an easy concept to understand. Below are the words you will typically see about margins.

  • Free margin
  • Available margin
  • Floating margin or margin held
  • Usable margin

Margin-free is the amount of money available for trading in Forex and, therefore, the equity in a trade. To make this easier, let’s look at an example.

Let’s say you have $1000 in your account. In other words, if no new trades are opened, then $1000 will be your free margin. Consider, however, that you just opened a trade for $300 for USD/JPY. You would have this margin.

The free margin (also known as usable or available margin) would be $700, and the floating margin would be $300.

What is Equity in Forex? Is it dangerous?

Equities are difficult to label as dangerous, but they do carry some risk. When you are trading, the equity is usually displayed on the trading terminal. Whether you are using MT4 or MT5, you can find it in the bottom left corner.

The equity part of your finances may not be considered every time, as you may only focus on the balance.

So, what’s the problem? As you can see, when you look at the balance, you don’t see how much money is left on your account. Instead, the balance represents how much money was on your account before the trade was opened. So, there is a possibility that the trade you opened could be in a bad situation and could cost you half of your balance.

You may consider opening another trading position if you have a substantial balance, which may mean putting your funds at risk. When trading Forex, it’s important to differentiate between equity and balance. A small mistake like this can have serious consequences for your account.

The margin with equity might be a bit complicated. It is extremely disproportionate how many names this feature has compared to how much it can do. You should know that margin with equity does the following:

Margin is the total of all open trades plus equity

As a Kenyan trader, you hold a margin equal to the number of funds you have opened

There’s not much else to describe

What is balance equity?

Your balance equity or account equity is the amount of capital you have on your account without any trades open.

In that case, if you had $1000 on your balance and waited to trade without doing so, your equity would be $1000.

What is floating equity?

You have floating equity when you have funds that are not yet on your balance. For example, suppose you opened a trade for $300 on USD/JPY. Suddenly, you find that your position is profitable after only one day.

You have made $450 on a $300 trade. You would have the same balance as you had in your initial balance of $300 if that was your balance, but your equity would be $450 because of the extra $150 you have as floating equity.

What is Negative Equity?

Having negative equity occurs when trade was unprofitable to the point that your account was wiped clean. The equity and balance of a trade can be extremely tricky in Forex; things sometimes occur. For example, consider the situation where you have a balance of $1000, and you open a USD/JPY trade of $500.

Suddenly, something has happened to the Yen, and its price is dropping, so you start losing money on the trade. A delay could cost you the $500 you started the trade with, and then you might reach the $500 remaining on your balance if you don’t attend to it quickly.

If a trader does not stop at that point, he may even be in negative equity. Only a larger deposit and closure of the trade would stop this from happening. The use of stop-loss orders is the easiest way to avoid this.

What does Equity in Forex refer to?

Wooden Blocks with the text: Equity

A Forex trader’s equity is the value of his account as a whole. As an open position trader, their trading platform will take several parameters into account when calculating equity. The charts in MetaTrader 4 (MT4), for example, display the following figures:

  1. For an understanding of Equity in Forex, the margin is the first parameter to consider. To take advantage of the leverage provided by the broker, Forex kentan traders must put up a certain amount of collateral. To control larger trades, traders can put up a certain sum of money (the margin in our case) on the foreign exchange market, thereby enabling them to leverage the market.
  2. Balance is the next one on the list. As a whole, it refers to the trader’s total balance at the beginning. Again, we want to emphasise that open positions are not affected until all of your active positions are closed.
  3. A third metric is a profit or loss that has not been realised. A trader’s account steadily accrues profit or loss based on all open positions, whether profit or loss in financial terms. These are unrealised profits or losses, not profits or losses as a whole.

In addition, their presence is simply a reflection of the actual positions on the market, and because they have not yet been credited into the account, they have not yet been realised and are subject to change. A trader’s profits or losses are only realised when a position is closed, and only then will they be able to be added to or subtracted from their account. Therefore, changes at this point cannot lead to a trader’s profits or losses.

  1. Trading equity in the forex market of Kenya is the last thing on our list. In particular, this refers to how much money one will come away with when all active positions have been closed. Moreover, a trader’s account balance is based on their equity and any unrealised profits or losses from an active position.

A trader’s equity can be defined as the profit or loss sustained by an account due to open or closed positions. In addition, equity changes as profits or losses in active positions are realised or unrealised.

Additionally, the FX trader’s equity becomes readily available once the trades are closed and the profits and losses have been added to or taken away from the actual account balance.

Margin, leverage, and FX equity are, in fact, related concepts. To maintain capital when trading in Kenya, a Forex trader needs to know how they are connected. The traders who suffer margin calls are the ones who don’t understand the connection between leverage, equity, margin, and the balance of their accounts.

Rather than establishing a balance between the trading equity, margin needs, leverage, and account capital, they open positions in an unbalanced manner.

How leverage is related to equity?

The leverage factor is also referred to as equity. It is generally recommended that equity on a Forex account be greater than the margin used for trades. This is because when it comes to determining the profits made or losses sustained on an account, leverage factor or equity applied for the trade is of great importance.

As a result, traders should understand how to utilise equity to balance risk and reward and how leverage plays a role in achieving this balance. An understanding of equity is also important when trading Forex.

Does equity affect me as a trader?

Technically, yes. You will not be able to open a new trade if you don’t have enough Forex equity. By having more equity, you can open more trades, and by having more equity, you can generate more returns on your investment.

A trader’s equity determines whether or not they will grow as traders, how many trades they will have open, and how they will generate profits as a whole. Trading would not be possible without it.

Bottom line

Forex trading in Kenya relies heavily on equity. Therefore, equity levels must be kept high enough that, even when some losing trades are made, the account will not suffer a loss in any way. Account equity can be increased by either increasing the margin requirement or increasing the leverage.

Take advantage of a free demo account to test out your newly-acquired knowledge. By using this method, you can assess whether you have truly learned all of the information and if you can effectively apply it in real-world situations.

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