The Big Idea
When you look at your trading account, you’ll see two important numbers: balance and equity. They sound similar, but they’re not the same thing. Confusing them can trick you into thinking you’re doing better (or worse) than you really are.
Think of it like your wallet and your bank account. Your wallet has the cash you can actually spend right now. Your bank account has your total money. If you’re expecting a paycheck, your future money isn’t in your wallet yet. Same kind of idea.
In trading:
- Balance is the money from trades you’ve ALREADY CLOSED
- Equity is your balance PLUS or MINUS any trades still open
Equity shows what you’d actually have if you closed everything right now. Balance just shows where you stood when all your trades were closed last.
A Simple Example
Let’s walk through this step by step.
You start with a $10,000 account.
- Balance: $10,000
- Equity: $10,000
They’re the same because you have no open trades.
You open a trade, buying some stock for $1,000. Nothing has happened yet.
- Balance: $10,000 (unchanged, trade still open)
- Equity: $10,000 (same, no profit/loss yet)
The stock moves up. Your open trade is now showing a $200 profit.
- Balance: $10,000 (still unchanged, trade still open!)
- Equity: $10,200 (balance plus open profit)
See the difference? Balance hasn’t moved because you haven’t closed the trade yet. But equity reflects the reality of what you’d have right now.
You close the trade at $200 profit.
- Balance: $10,200 (now updated, trade closed)
- Equity: $10,200 (matches balance again)
When you have no open trades, balance and equity are always equal.
Why They Can Be Different
The key idea: your balance only updates when trades CLOSE. It doesn’t care what’s happening with open positions. Equity, on the other hand, constantly updates based on the current market prices of your open trades.
Let’s say you have:
- Balance: $10,000
- Three open long positions, currently down $800 total
Your account situation:
- Balance: $10,000 (shows your closed trade history)
- Equity: $9,200 (shows reality – you’d have $9,200 if you closed everything now)
Which number is “real”? Equity. That’s what you actually have. The $10,000 balance is a little bit of a lie if you cashed out right now.
Why This Matters
Problem 1: The “Hope Trade”
Some traders only look at their balance. They keep losing trades open forever, telling themselves, “It’ll come back. My balance is still $10,000!”
But their equity might be $5,000. They’re actually down $5,000 in real terms. They’re just refusing to accept the loss by not closing the trade.
This is called “hope trading” and it’s how accounts die slowly. Equity is reality. Balance is denial.
Problem 2: Fake Wins
The opposite works too. You might have winning open trades. Your balance says $10,000, but your equity is $12,000 because of open profits.
If you celebrate and act like you already have the profits, you’ll be disappointed when the market reverses and those “profits” disappear. Open profits aren’t real until you close the trade.
Problem 3: Margin Calculations
Brokers use EQUITY (not balance) to decide if you’re safe or in trouble. When your equity drops too close to your used margin, you get warnings or margin calls.
If you only watch balance, you might think you’re fine, when really your equity has dropped to dangerous levels.
Other Important Account Numbers
Your trading platform probably shows a few more numbers besides balance and equity. Here’s what they mean.
Used Margin
The money tied up in your current open trades. You can’t use this for new trades until you close the existing ones.
Free Margin
This is your equity minus used margin. It’s the money available for new trades or to absorb losses.
Margin Level
Calculated as (Equity ÷ Used Margin) × 100%. This percentage shows how safe you are. Above 200% is usually fine. Near 100% is getting scary. Below 100% can trigger forced closures.
Floating P/L
Also called “Unrealized P/L.” This is the profit or loss from your open trades. It’s the difference between balance and equity.
Formula: Equity = Balance + Floating P/L
Common Mistakes Beginners Make
Mistake 1: Only Watching Balance
This leads to denial. You ignore losing trades. Equity drops but you keep saying, “My account is fine!” Until the margin call hits.
Mistake 2: Calculating P/L from Balance
Some beginners compute their profit from balance changes only. But this misses all the open trade movement. Always include equity when measuring performance.
Mistake 3: Confusing Equity Gains with Real Gains
You open a trade, it shoots up, your equity soars. You feel rich! Then the trade reverses and your equity drops back. Open profits aren’t real until you lock them in by closing the trade.
Mistake 4: Not Understanding Margin Impact
With leveraged accounts, equity matters WAY more than balance. Margin calls are triggered by equity drops, not balance drops. Watch the right number.
The Big Picture
Balance and equity are like two different mirrors. Balance shows you where you’ve been. Equity shows you where you are RIGHT NOW.
Here’s what to remember:
- Balance = money from closed trades only
- Equity = balance plus/minus open trade P/L
- Equity is the “truth” because it updates constantly
- When no trades are open, balance and equity are equal
- Brokers use equity (not balance) for margin decisions
- Don’t hide losses by keeping bad trades open – equity already knows!
- Open profits aren’t real profits until you close the trade
A smart trader once said: “Your equity tells the truth. Your balance tells a story.” Make sure you’re reading the right one.
Related Terms
- What Is Margin? — How equity relates to margin requirements
- What Is Drawdown? — Measured using equity, not balance
- What Is Leverage? — Why equity matters so much with leverage
- What Is Liquidation? — When equity drops too low
- What Is Position Size? — Size based on equity, not balance
← Back to the Complete Trading Terms Glossary
Focus on the process. Trust the stats. Stay consistent.