What is Equity?
Equity is the amount of free, not involved in trading funds in the forex trader’s account at the current moment. To determine the equity brokers use the following formula: Equity = Balance + Credit + Floating Profit − Floating Loss − Margin for open trades.
Equity is constantly changing if a trader has opened any deal. It depends on the result of a deal. When profit increases, equity increases too; when a trader loses money, equity decreases accordingly. All calculations are usually performed automatically in the trading terminal.
In other words, we can say that Equity in the forex market is nothing more than the balance of the trading terminal minus the deposit amount and plus or minus the financial result of the trader’s deals. In case a trader closes all of their open orders, the balance amount and the amount of equity have the same values.
Let’s use a simple example to illustrate the concept of equity. The trader now has $100 in his account. He has one open deal, for which the deposit amount is $1, and his loss is $5. In this case, the equity is equal to 100 − 1 − 5 = $94. That’s a simple counting, but remember that with an open trade, these numbers can change like in a kaleidoscope.
Why Should a Trader Track the Equity?
Equity reflects the current situation for all positions that a trader has opened. By subtracting the margin requirements from the equity, a trader gets free margin, which can be used for further trading. If the free margin at some moment is not enough to maintain the positions, the broker first sends a trader a notification about the need to replenish the balance. If a trader ignores this notification, and the market goes further against the trader, the broker closes all of their positions forcibly.
The notification about the need to replenish the balance in order to avoid forced closing of positions is called “Margin call”. Forced closing of positions by the broker due to lack of free funds is called “Stop out”. Once the liquidation process of positions is started, it is usually not possible to stop it since the process is automated.
Forex brokerages thresholds for Margin call and Stop Out are not similar. However, usually, the Stop Out level is at 20% – 30%.
Why Should a Broker Track Its Clients Equity?
There are two main reasons:
- When a trader goes negative having a bonus in their account that was provided by a broker, the broker loses its own money.
- When a brokerage company sends client orders directly to the market and some of its clients reach a negative balance, the company also loses money, as it will have to compensate for a loss.
That is why it is important to automate tracking clients’ equity for forex brokers. Thus, brokers use special software like StopOut Email Notifier that watches StopOut and MarginCall events happening in the accounts and sends notification to traders letting them know about them, and Equity Stopout plugin that closes all open positions if the equity level reaches value set by the broker in the tool settings.