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Preschool Margin Trading 101: Understand How Your Margin Account Works
What is Equity?
Since you haven’t opened any trades yet, your Balance and Equity is the
same.
How to Calculate Equity If You Have Trades
Open
If you have open positions, your Equity is the sum of your account balance
and your account’s floating P/L.
Price moves immediately against you and your trade shows a floating loss
of $50.
Beyoncé tweets again and says she’s changed her mind. She’s now long
GBP/USD.
Not only is she Crazy in Love, but she seems crazy in trading also.
But because she’s the Queen B, you follow what she says and go long
also.
Price moves immediately in your favor and your trade shows a floating gain
of $100.
If your account is “flat” or does NOT have any positions open, then your
Balance and Equity are the SAME.
But if you do have open positions, this is when the Balance and Equity
differ.
This means that when you’re looking at your Balance, it is NOT the actual
realtime amount of your funds.
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Since Equity includes current profits or losses from open trades, it is Equity
that shows the realtime amount of your funds.
It’s possible to have a very large Balance, but very small Equity.
This happens when your open positions have a large unrealized (floating)
losses.
For example, if your Balance is $1,000, and you have an open trade that
has a floating loss of $900.
Recap
In this lesson, we learned about the following:
Equity is your account balance plus the floating profit (or loss) of all
your open positions.
Equity represents the “realtime” value of your account.
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