Equity, balance and margin — three numbers on a trader account

Picture an account with a balance of ten thousand zloty and a single open position on the euro against the dollar, currently underwater by three hundred zloty. Your balance still reads ten thousand, yet your equity has already slipped to nine thousand seven hundred. The broker has locked roughly three thousand three hundred and thirty-three zloty as a deposit against that position, leaving six thousand three hundred and sixty-seven of free capital and a margin level of two hundred and ninety-one per cent. Four different numbers describe the very same account in the very same second. Below I explain what each of them really means.

Three numbers that describe one account

The first time you open a trading platform and click the tab with your open positions, a row of fields appears along the bottom: balance, equity, margin, free margin and margin level. Most beginners look only at balance and then wonder why the broker's statements do not match the screen. In reality these numbers describe the account from different points in time. Balance speaks about the past, equity about the present, while free margin and margin level tell you how much room you have left and how close you are to trouble.

Over more than a decade of editing the MyBank.pl portal and analysing the currency market, I have seen hundreds of screenshots from readers panicking that their account showed less than they had deposited. Nine times out of ten it was no glitch and no hidden fee, just a misunderstanding of the gap between balance and equity. Once you grasp how these numbers convert into one another, the panic gives way to calm control.

Balance — the tally of closed trades

Balance is the sum of every booked operation since the account was opened: deposits minus withdrawals, plus realised profits, minus realised losses, adjusted for swap points. The crucial word is realised. Balance cares only about positions already closed; while you hold one open, its result does not exist for balance, not even for a moment.

That is why balance is so stable. You can walk away for a whole day, the price can swing by hundreds of pips, and balance will still show the morning's amount. It changes only the instant you click close, or when your stop loss or take profit fires — a dry, objective accounting figure.

In our example the balance is 10,000 zloty. That is what you deposited, you have closed nothing yet, so the tally of closed trades equals the deposit — and it stays that way, win or lose, right up until you close the position.

Equity — the balance with open positions included

Equity is balance increased or decreased by the unrealised result of all open positions — in the jargon, floating P/L, floating because it shifts with every tick. Equity is therefore a living number: when the market moves your way it rises above balance, and when it moves against you it drops below, even though balance itself does not budge.

It is equity, not balance, that is your real account value at any moment. If you closed every position right now, balance would converge on today's equity. Put simply: equity shows how much would actually be in the account if you had to liquidate the whole portfolio this second.

In our example the position is underwater by 300 zloty, so equity reads 9,700 — 10,000 of balance minus 300 of floating P/L. Had it been 300 in profit, equity would read 10,300, while balance stayed at 10,000 either way. With no open position, floating P/L is zero and equity equals balance to the last grosz. A neat test: if the two numbers differ, you have something open.

Margin — the deposit locked under a position

Margin, also known as the security deposit or used margin, is the slice of capital the broker locks while you hold a position — neither a fee nor a commission, but funds set aside against potential losses. It equals the notional value of the position divided by the leverage. Under the 1:30 leverage that the European regulator ESMA imposes on major currency pairs, opening one full lot with a notional of a hundred thousand units of the base currency means locking one thirtieth of that value.

A hundred thousand divided by thirty comes to roughly 3,333 zloty — exactly what the broker sets aside here. This deposit does not vanish; once the position closes it returns to the pool of free funds, adjusted for the result of that trade. Margin is not a cost but a bond: you borrow exposure thirty times your own stake, and the broker holds your bond as a cushion in case the market turns against you.

The relationship is simple: the larger the position, the more capital gets frozen and the less freedom you have left. Two lots instead of one mean a doubled deposit and half the buffer.

Free margin and margin level — the buffer and the compass

Free margin is simply equity minus the locked deposit. It is your genuinely available cash — the capital you can devote to new positions, or which will absorb a deepening loss on those already open. In our example equity is 9,700 and the deposit 3,333, so free capital comes to 6,367 zloty — your safety buffer.

Margin level is the same information as a percentage: equity divided by the locked deposit, times one hundred. In our case 9,700 divided by 3,333 gives roughly 291 per cent — equity nearly three times the deposit frozen under the position. The higher this percentage, the safer you are; the lower it gets, the closer to the edge.

These two numbers act as a compass: free margin tells you how much more you can do, and margin level how far you are from the moment the broker takes over. Seasoned traders never read price in isolation from margin level — one without the other is like watching the speedometer with no fuel gauge.

"The goal of every trader should be survival in the market, not getting rich quickly. Money management decides whether you stay in the game long enough for your edge to do its work." — Alexander Elder, "Trading for a Living", 1993

What happens when margin level falls

Margin level stays calm as long as the market does not deepen your losses. The more equity melts under floating P/L, the lower it drops — the deposit stays constant while the numerator of that fraction shrinks. When the level reaches one hundred per cent, equity equals the locked deposit exactly and you have no free capital left. At that point a margin call appears — a warning after which the broker blocks any new positions.

If the loss deepens further and margin level falls to fifty per cent, stop out kicks in — the broker begins closing positions automatically, starting with the most loss-making one, to salvage whatever remains. This is not malice but a mechanism protecting both sides from a negative balance. Exact thresholds vary between brokers, but a margin call at one hundred per cent and a stop out at fifty are the standard typical of a market under ESMA supervision.

So margin level is not trivia but an early warning system. When it drops below two hundred per cent, the position is too large relative to your capital and one sharper move could push you into margin-call territory. Choose position size so this scenario stays remote — sound risk management is precisely about keeping that distance.

How to read these numbers — three actions before a position

Before you click buy or sell, run through three short checks that become second nature within a few weeks.

1. Compare balance with equity. If they differ, you have open positions, and the difference is your floating result. Understand where it comes from before you add anything new. Equity, not balance, is your true account value right now.
2. Check how much deposit the new position will consume. Divide its notional by the leverage and compare with your free margin. If the planned deposit would eat most of your free capital, the position is too large — cut the size. A healthy habit is to keep the locked deposit well below the available buffer.
3. Look at margin level after opening. If the position would push the level towards two hundred per cent or lower, you are overleveraged. Operate with a wide margin so ordinary price swings never bring you near the margin-call threshold. The mechanics of position sizing are worth working through before, not after, you trade.

These three numbers — balance, equity and margin — are not platform bureaucracy but the instrument panel of your account. A pilot does not take off without watching the gauges; a trader should not open a position without understanding what equity and margin level are saying. Learn to read them by reflex and you will make far more decisions in the cold light of reason than in the heat of emotion.