2.9. Balance vs. Equity

Equity is the amount of money you would have after adding floating profit or floating loss when you close all trades.

Balance is the amount of money you have right now after adding profit and loss from closed trade.

 

Below you will see the comparison of typical traders who win some and lose some with OctaCapital traders who seek to win all the time. Balance-equity chart will depict it clearly.

Balance vs Equity - 95 trader trading results

From the “95% Trader’s Trading System Result” chart above, you see that the movement of equity and balance are almost the same. The reason is that traders try to predict the direction of the price. When they get wrong, they cut their loss and close their trade. And when they get right, they book their profit and close their trade also. Therefore the movement of balance and equity are identical.

You will see that the movement of balance and equity are always up and down because they will win some and they will lose some. But the trend movement of balance and equity are definitely going down. And they will keep going down until all capital depleted; the process can be fast or it can be slow depending on your risk ratio. The higher your risk the faster your capital will be depleted and vice versa. But in the end you always lose.

If you gamble with 50:50 odds and the winner takes all, statistically you will end up with the same capital in the long run. But since Forex Trading is not a zero sum game (contrary to common beliefs), regardless you win or lose, your result will always be deducted or added by transaction costs. That is why the trend movement of balance and equity will always go down until you lose all of your capital.

 

Balance vs Equity - Octacapital Trading Results

In comparison with my system, the OctaCapital trading system which seeks 100% winning rate, your balance and equity will always grow. It is because that you do not have any loss that will be deducted from your balance and your profit is bigger than your transaction costs. Your equity will swing up and down but you always close your trade with profit. You will be confident that your balance will be able to compensate the swing because you use no leverage and you do not use stop loss at all. However, if you use proper leverage, you are also confident that your balance will be able to compensate the equity swing. And it is because you have calculated in advance the capital required in order to use the proper leverage.

 

In summary:

  • Always seek for 100% winning rate system.
  • Forex Trading is not a zero sum game; meaning that your balance will always be deducted by transaction costs regardless you win or lose.
  • If you use 100% winning rate trading system with proper leverage, your balance and equity will grow positively in a steady manner.
  • If you use prediction based trading system, soon or later your balance will become less and less until your capital is completely gone.