Understanding account balances is crucial for risk management and trading decisions. Let’s break down each term with examples:
Account Value
Definition:
The total value of all assets in your trading account, including cash and unrealized profits or losses.
Formula:
Account Value = Balance + Unrealized P&L
Example:
Initial deposit: $10,000
Open position: $2,000 profit (unrealized)
Account Value = $10,000 + $2,000 = $12,000
Balance
Definition:
The amount of money in your account after closing all open positions, excluding any unrealized P&L.
Example:
You deposit $10,000 and have no open trades.
Your Balance = $10,000.
After closing a trade with a $500 profit, your Balance becomes $10,500.
Equity
Definition:
The current value of your account, including unrealized profits or losses from open positions and any credit provided by the Tradeway.
Formula:
Equity = Balance + Unrealized P&L + Credit
Example:
Balance: $10,000
Unrealized P&L: -$1,000
Credit: $1,000
Equity = $10,000 - $1,000 + $1,000 = $10,000
Credit
Credit is a non-withdrawable bonus or extra funds provided by the Tradeway to your trading account. It acts as collateral to enhance your trading capacity, allowing you to open larger positions or maintain existing ones during drawdowns. During drawdowns, Credit can help prevent margin calls or automatic position liquidations by improving your Margin Level. Credit is often provided under specific conditions, such as promotional campaigns, and may be removed if terms are violated.
Example:
You deposit $5,000, and the broker gives a $1,000 bonus.
Credit = $1,000.
Total funds available for leverage = Balance + Credit = $5,000 + $1,000 = $6,000.
Margin Used
Definition:
The portion of your account balance that is locked to maintain your open trades.
Formula:
Margin Used = Trade Size / Leverage
Example:
Trade size (Notional Value): $100,000
Leverage: 100:1
Margin Used = $100,000 / 100 = $1,000
Margin Available
Definition:
The amount of equity available to open new trades.
Formula:
Margin Available = Equity - Margin Used
Example:
Equity: $9,000
Margin Used: $1,000
Margin Available = $9,000 - $1,000 = $8,000
Margin Level
Definition:
A percentage indicating the health of your account. It’s the ratio of Equity to Margin Used.
Formula:
Margin Level (%) = (Equity / Margin Used) × 100
Example:
Equity: $9,000
Margin Used: $1,000
Margin Level = ($9,000 / $1,000) × 100 = 900%
When your margin drops below 100% Tradeway will send you and email, and when your margin level drops to a 50% or below, the system will automatically start closing your positions.
Profit and Loss (P&L)
Definition:
The difference between the entry price and the current price of your open positions.
Example:
Buy EUR/USD at 1.1000, current price 1.1050, 100,000 units.
P&L = (1.1050 - 1.1000) × 100,000 = $500 (profit).
Net P&L
Definition:
The total realized and unrealized P&L after accounting for trading costs, such as spreads, commissions, and swaps.
Example:
Realized profit: $200
Unrealized loss: -$50
Trading costs: $5
Net P&L = $200 - $50 - $10 = $140