What equity is

The figure that moves 

Two positions are open. Neither has been closed, no cash has moved in or out, and the balance printed at the top of the account panel has not changed since the last deposit cleared. Directly beneath it a figure is ticking. Every part of that figure can be accounted for. It is the balance, unchanged, plus the sum of what both open positions would produce if both were closed at the prices quoted at this instant.

Nothing in that sum is estimated and nothing is forecast. Each open position is valued at the price at which it could currently be closed, the distance from its opening price is multiplied by the size of the contract, and the results are added together. That total is the unrealised profit and loss on the account, built in the lesson before last. Equity is what the balance becomes once the total is carried into it. When the last open position is closed the unrealised total collapses to zero, the realised result posts to the balance, and equity and balance are the same number again until something else is opened.

The formula, and the sign that does the work 

Equity is balance plus unrealised profit and loss. The addition is signed, and the sign is the whole of the arithmetic: a running loss is a negative quantity, so adding it subtracts. The sum runs across every open position at once rather than one position at a time, so a contract running in favour and a contract running against offset each other before either reaches the equity line. Equity therefore reports the net state of the account, never the state of any single contract inside it. On both platforms YAL runs, MetaTrader 5, the field is printed directly alongside the balance, so the addition is never performed by hand. Performing it by hand once is still the fastest way to confirm that the printed field is the sum described here and not something else.

The balance row is the one worth reading twice. It is identical in both cases, and it would stay identical if both positions doubled their running results or reversed them again an hour later. The balance is the line the two equity figures are measured from, and it is the only line in the block that does not move.

Why the margin arithmetic reads equity 

Used margin, the field built in the previous lesson, is collateral held against obligations that already exist. The question a platform puts to it is whether the account still holds enough value to stand behind those obligations right now, and a figure that ignores how the obligations are currently doing cannot answer that question at all. Balance ignores precisely that. It is the total of what has finished, and an open position has not finished, so an account described by its balance is described as though its open contracts were not there.

Equity is the figure that includes them, and that inclusion is the entire reason the arithmetic reads it. The comparison a platform performs is between equity and used margin: value that could be realised now, set against collateral already committed. Expressed as a percentage, that comparison is the margin level, and the level at which a platform closes positions on its own initiative is a close out. Both are built in the lessons that follow, and neither is needed here. What matters at this point is only which number enters the comparison, because every field downstream inherits it.

Why equity can fall below the margin required 

Two properties collide here, and neither of them is a rule anybody chose. The first is that used margin is calculated when a position is opened and then held, so it does not fall as the position runs against the account. The second is that unrealised profit and loss is calculated on the full contract value rather than on the margin posted against it, so an adverse move is measured against the whole contract, a running loss can exhaust the margin posted entirely, and losses are not limited to the amount deposited. A favourable move is measured on exactly the same basis and to exactly the same degree.

Put the two properties together and the result follows without any further assumption. One term is fixed at opening, the other moves without a floor, and they are combined with a balance that stands still. Nothing in the structure prevents the moving term from carrying equity below the fixed one. The block below walks a single position to that crossing and the same distance in the opposite direction.

The row where equity meets used margin is not a special event inside the arithmetic. It is the point at which the running loss has consumed the difference between the balance and the collateral already committed, and the arithmetic carries on straight through it into the row beneath. What a platform does at and below that point is a matter of the account's terms rather than of arithmetic, and those terms are the subject of the margin call and stop out lessons later in this module.

What else moves the figure 

Price is not the only input, and the other three are commonly mistaken for it. A deposit or a withdrawal moves the balance, and equity moves with it because equity contains the balance. Charges booked in cash do the same: commission at the moment it is charged, and any overnight financing adjustment at the moment it is applied, both reach the balance and therefore both reach equity. And the closing of a position moves equity by nothing at all at the instant it closes, because its running result leaves the unrealised total and arrives in the balance as a realised one, and the two changes are equal and opposite. Equity is continuous across a closing. Balance steps.

Where practitioners disagree 

The first disagreement is about which price an open position should be valued at, and its consequences are arithmetic rather than philosophical. A position is conventionally marked at the price at which it could actually be closed, which for a contract that gains from a rise is the lower of the two prices quoted and for a contract that gains from a fall is the higher one. Marking at the midpoint of the two quotes instead produces a slightly more favourable unrealised total, and therefore a slightly higher equity, on every open position at once. Practitioners who prefer the closing price argue that a valuation which could not be obtained is not a valuation. Those who prefer the midpoint argue that the closing convention charges the cost of exit continuously, on every tick, for an exit that happens once. Both conventions are in live use, they diverge by an amount that grows with the number of open positions, and which one applies to a given account is stated in that account's terms rather than deducible from the figures on the panel.

The second concerns whether unrealised profit should be treated as available at all. One tradition treats equity as the honest figure precisely because it is what the margin arithmetic reads, and observes that declining to count floating profit does nothing to stop it from disappearing. Another treats unrealised profit as provisional by definition, notes that gaps have extinguished it in every market that has ever gapped, and holds that only realised amounts belong in any account that is being counted. The two positions are not reconcilable from the arithmetic, because they answer different questions: one asks what the account is worth to the platform at this instant, the other asks what has actually been earned. This page takes no position on which question anybody should be asking.