Glossary
Equity
Equity is an account's balance plus or minus the profit or loss on trades that are still open.
What it means
Balance changes only when trades close. Equity changes with every price move while trades are open. When nothing is open, equity and balance are the same. Platforms show both, along with used margin and free margin, which is equity minus the margin already tied up in open trades.
Equity matters in prop trading because many firms measure loss limits against it. An account can breach its daily loss limit or maximum drawdown on an open loss, even if the trade would later have recovered. Traders should know whether their firm's rules use balance or equity, and firms should say so plainly and show live equity against each limit.
Worked example
Illustrative numbers: an account has a balance of $100,000 and one open trade down $3,500, so equity is $96,500. If the firm's maximum drawdown floor is $97,000 measured on equity, the account has already breached, even though the balance has not moved.
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