Equity vs. Balance: What’s the Difference in Trading?

If you’ve ever opened a trading platform and stared at the numbers labeled Balance and Equity, you’re not alone. For beginners, the two often look interchangeable. For experienced traders especially in prop trading they represent very different realities. Misunderstanding the difference between equity and balance can lead to poor risk management, unexpected margin calls, and even failed prop firm evaluations.

In this article, we’ll break down equity vs. balance in plain English. You’ll learn what each metric really means, how they change in real time, and why prop traders pay far more attention to equity than balance. We’ll also look at practical examples, common mistakes, and how these numbers affect drawdowns, margin, and trading psychology.

Understanding Balance in Trading: What Is Balance?

In trading, balance refers to the amount of money in your trading account after all closed trades are settled. It does not include any floating profit or loss from open positions.

Think of balance as your account’s historical snapshot. It reflects what you’ve already earned or lost, not what’s happening right now.

For example:

• You start with $50,000.
• You close a trade with a $1,000 profit.
• Your new balance is $51,000.

If you then open another trade and it’s currently down $500, your balance does not change. It stays at $51,000 until you close that trade.

How Balance Changes

Balance changes only when:

• A trade is closed (profit or loss realized)
• Fees, commissions, or swaps are applied
• A deposit or withdrawal is made (in personal accounts)

It does not move with market fluctuations while trades are open. This makes balance a stable number—but also a potentially misleading one if you rely on it alone.

Why Balance Matters

Balance is useful for:

• Tracking long-term performance
• Calculating realized profits
• Reporting results to investors or prop firms

However, balance tells you nothing about your current risk exposure. That’s where equity comes in.

Understanding Equity in Trading

What Is Equity?

Equity represents the real-time value of your trading account. It includes your balance plus or minus any floating profit or loss from open positions.

In simple terms:

Equity = Balance + Unrealized P&L

If your open trades are in profit, equity is higher than balance. If they’re in loss, equity is lower.

How Equity Moves in Real Time

Unlike balance, equity is dynamic. It changes with every tick of the market.

Example:

• Balance: $51,000
• Open trade floating loss: –$500
• Equity: $50,500

If the trade moves into a $300 profit:

• Equity becomes $51,300
• Balance stays $51,000 until the trade is closed

This constant movement is why equity is often called your true account value.

Why Equity Is Crucial

Equity determines:

• Margin availability
• Risk of margin calls
• Drawdown calculations
• Whether you pass or fail a prop firm challenge

For active traders, equity is far more important than balance on a day-to-day basis.

Equity vs. Balance: The Core Difference

The difference between equity and balance comes down to time and reality.

• Balance shows what has already happened.
• Equity shows what is happening right now.

Balance is backward-looking. Equity is present-focused.

This distinction becomes critical when:

• You hold positions overnight
• You trade volatile markets
• You’re subject to strict risk rules (as in prop trading)

Many traders fail not because their strategy is bad, but because they focus on balance while ignoring equity.

Practical Example: Equity vs. Balance in Action

Let’s look at a realistic scenario.

You’re trading a $100,000 prop firm account.

• Starting balance: $100,000
• You open three trades.
• Total floating loss: –$3,000

At this moment:

• Balance: $100,000
• Equity: $97,000

Now imagine the prop firm has a maximum drawdown of 5%, calculated on equity. That means your minimum allowed equity is $95,000.

You’re already $3,000 down in equity even though your balance looks perfect. One more losing move and you could violate the rules, despite having “no losses” on balance.

This is why prop firms emphasize equity-based rules.

Why Prop Firms Focus on Equity, Not Balance

Equity Reflects Real Risk

From a prop firm’s perspective, equity is the only number that matters. It shows:

• How much risk you’re currently taking
• Whether losses are controlled
• How close the account is to failure

Balance can look healthy while equity is collapsing. Firms don’t want traders hiding risk in open trades.

Drawdown Rules Are Equity-Based

Most prop firms use:

• Maximum equity drawdown
• Trailing drawdown based on equity highs

This means even unrealized losses count against you.

For example:

• You hit an equity high of $103,000.
• The firm applies a 5% trailing drawdown.
• Your new minimum equity is $97,850.

If equity dips below that even temporarily you fail.

Balance is irrelevant in this calculation.

Equity, Margin, and Free Margin

How Equity Affects Margin

Equity plays a direct role in margin calculations:

• Used Margin: Capital tied up in open trades
• Free Margin: Equity minus used margin

If equity drops, free margin drops too. When free margin approaches zero, you face a margin call or forced liquidation.

Balance doesn’t protect you here. Only equity matters.

Example

• Balance: $20,000
• Equity: $18,000
• Used margin: $15,000
• Free margin: $3,000

A further loss of $3,000 wipes out free margin even though balance still shows $20,000.

Common Trader Mistakes Around Equity and Balance

Mistake 1: “I Haven’t Lost Anything Yet”

Many traders think losses don’t count until trades are closed. This mindset is dangerous.

Markets don’t care whether losses are realized or unrealized. Neither do prop firms.

Mistake 2: Holding Losing Trades to Protect Balance

Some traders avoid closing losing trades because they don’t want balance to drop. Meanwhile, equity keeps falling, increasing risk.

This often leads to:

• Larger drawdowns
• Emotional decision-making
• Forced stop-outs

Mistake 3: Overtrading After Balance Gains

A trader sees balance increase after a few wins and increases position size aggressively. Equity, however, may swing wildly and breach risk limits.

Balance creates confidence. Equity reveals whether that confidence is justified.

Equity and Balance in Different Trading Styles

Day Trading

Day traders close positions frequently, so balance and equity often align by the end of the day. Still, intraday equity swings matter for margin and risk control.

Swing Trading

Swing traders hold positions for days or weeks. Equity can deviate significantly from balance during this time, making equity monitoring essential.

Scalping

Scalpers rely heavily on equity because:

• Small price movements matter
• Margin usage is high
• Risk accumulates quickly

In scalping, ignoring equity even briefly can wipe out an account.

Psychological Impact: Why Equity Feels More Stressful

Balance feels comforting because it’s stable. Equity feels stressful because it fluctuates constantly.

This psychological gap causes traders to:

• Obsess over floating losses
• Close winning trades too early
• Avoid necessary stop-losses

Professional traders learn to emotionally detach from equity fluctuations while still respecting them from a risk perspective.

The goal is not to ignore equity but to understand it without overreacting.

How to Use Equity and Balance Together

Successful traders don’t choose between equity and balance. They use both.

• Balance for performance tracking and strategy evaluation
• Equity for risk management and decision-making

A simple rule of thumb:

• If you’re analyzing results, look at balance.
• If you’re managing risk, look at equity.

Equity vs. Balance in Trading Platforms

Most platforms display both metrics clearly, but traders often customize views.

Best practices:

• Keep equity visible at all times
• Set alerts based on equity levels
• Track maximum equity drawdown manually or with tools

In prop trading, many traders also maintain external spreadsheets to monitor equity highs and trailing drawdowns accurately.

Why Understanding Equity vs. Balance Can Save Your Account

Many blown accounts share a common story:

• The balance looked fine.
• Equity quietly deteriorated.
• Risk limits were breached unexpectedly.

Understanding the difference between equity and balance helps you:

• Avoid rule violations
• Control drawdowns
• Trade with clarity instead of false confidence

It’s not just a technical detail it’s a foundational concept.

Key Takeaways

• Balance shows realized profits and losses from closed trades.
• Equity reflects real-time account value, including open positions.
• Equity moves constantly; balance does not.
• Prop firms base drawdowns, margin rules, and failures on equity.
• Ignoring equity is one of the fastest ways to blow a trading account.
• Professional traders monitor equity closely while using balance for performance analysis.

Understanding equity vs. balance isn’t optional it’s essential for consistent, rule compliant trading.

FAQ

What is more important: equity or balance?
For risk management and prop trading rules, equity is more important. Balance is mainly useful for tracking realized performance.

Can equity be higher than balance?
Yes. If you have open trades in profit, equity will be higher than balance until those trades are closed.

Do prop firms calculate drawdown based on balance or equity?
Most prop firms calculate drawdowns based on equity, including unrealized losses.

Why does my balance stay the same while I’m losing money?
Because losses are unrealized. Balance only changes when trades are closed, while equity reflects live market movements.

Should I close trades just to protect equity?
You should manage trades based on your strategy and risk rules, not emotions. However, protecting equity is critical to long-term survival.