Understanding the word “balance” is one of the first and most practical steps a new forex trader takes. At its simplest, balance is the cash in your trading account — the amount that reflects deposits, withdrawals and the results of trades that have already been closed. But in practice, balance sits at the centre of several related figures traders use every day: equity, margin, free margin and margin level. Knowing how those figures interact helps you size trades, manage risk and avoid unpleasant surprises like margin calls.
The basic definition: balance versus open trades
Your account balance shows the amount of real money in the account after all closed trades and settled transactions. It does not include any profits or losses from positions that are still open. If you deposit $1,000 and then open a trade that immediately moves into a $100 unrealised profit, your balance remains $1,000 until you close that trade. The unrealised gain will show in another number — equity — but not in the balance.
This distinction is important because balance is a historical number (what has been realised so far), while equity shows the current, live value of your account including open positions.
Balance, equity, margin and free margin — how they fit together
When you trade on margin, several account figures update dynamically. Balance, equity, margin and free margin are best understood as pieces of the same picture.
Equity is the balance plus or minus the floating (unrealised) profit or loss from open positions. If your closed-trade balance is $2,000 and your open trades currently show a combined unrealised loss of $300, your equity is $1,700. Equity tells you the account’s live value if all positions were closed right now.
Margin is the portion of your funds that is locked by the broker to keep open positions. Brokers set margin requirements based on position size and your account leverage. Free margin is the difference between equity and margin; it is the amount available to open new positions or absorb further losses. Finally, margin level is a ratio — usually expressed as a percentage — that compares equity to margin and is used by brokers to trigger margin calls or stop-outs when the account gets too close to being unable to meet margin requirements.
Concrete example: you deposit $1,000 and open a position that needs $200 margin. The trade moves to an unrealised profit of $50. Your balance stays $1,000, equity becomes $1,050, margin is $200 and free margin is $850. If the trade later turns into a $300 unrealised loss, equity drops to $700 and free margin becomes $500.
A worked example with leverage
Leverage lets you control a larger position with a smaller deposit. That affects margin and therefore your free margin and margin level.
Suppose you buy one standard lot (100,000 units) of EUR/USD at 1.1000 and your broker offers 1:50 leverage. The notional value of that position is 100,000 × 1.1000 = $110,000. The required margin is 110,000 ÷ 50 = $2,200. If your account balance is $3,000 before opening the trade, and the position has an unrealised loss of $500, then equity is $2,500, margin is $2,200 and free margin is $300. That small free margin shows how quickly adverse moves can leave little room for error when you use leverage.
What changes your balance?
Balance changes only when money is realised or formally moved in/out of the account. Typical events that change balance include closing trades (realised profit or loss), deposits and withdrawals, and some broker charges or credits that are settled to the account. Examples are commissions, trade-related fees and account bonuses if the broker applies them to the cash balance. Swap or rollover charges for holding positions overnight may be posted daily and can affect equity immediately and balance when realised.
Open positions and their unrealised P/L do not change the balance until those positions are closed.
Why balance matters for trade planning
Balance is the starting point for capital management decisions. Many position-sizing rules — such as risking a fixed percentage of account balance per trade — use balance as the reference amount. Balance also shows the historical performance of closed trades, which is useful when reviewing strategy results.
At the same time, balance alone doesn’t tell you how much you can safely trade right now. For that you need to watch equity and free margin, because these reflect live exposure. Traders who focus only on a large balance while ignoring equity can become overexposed and risk margin calls during volatile market moves.
Common beginner mistakes around balance
A frequent error is treating unrealised profit as if it were locked cash. Seeing green numbers from open trades often tempts traders to increase position size or withdraw perceived gains prematurely. Because open profits can evaporate, the safe assumption is that balance — not equity — is the amount you can reliably withdraw without increasing risk to open positions.
Another mistake is not understanding how leverage and margin affect free margin. A respectable account balance can be misleading if your open positions are consuming most of your margin and leaving little buffer against adverse moves.
Practical balance management tips
Good balance management is part technical and part behavioural. Start by keeping a clear record of deposits, withdrawals and realised P/L so you always know the cash component of your account. Use position sizing rules tied to balance — for example limiting risk per trade to a small percentage of balance — so any single loss is unlikely to materially reduce your ability to trade. Reconcile balance and equity regularly and monitor free margin to ensure you have room to withstand normal market moves. Consider using a demo account to practise how margin and balance behave under different scenarios before trading live.
When you make regular profits, consider a withdrawal or partial withdrawal plan. Taking some gains off the table can reduce emotional pressure and preserve capital. Conversely, if you add funds to the account, adjust position sizing and risk parameters rather than assuming you can immediately scale up in the same proportion.
Psychological effects of watching your balance
Balance is a simple number and it influences feelings about trading: rising balance can cause overconfidence; falling balance can induce fear and impulsive attempts to recover losses. Both extremes are risky. Focusing on the process — consistent risk management and disciplined trade execution — tends to produce steadier balance growth than reacting to short-term fluctuations.
Treat balance as a bookkeeping anchor, equity as the real-time health check, and free margin as the operational limit. Keeping those roles separate helps prevent emotional decision-making based solely on the headline balance number.
Risks and caveats
Trading forex involves risk and can result in the loss of your invested capital. Balance does not reflect unrealised gains and can give a false sense of security if you ignore open positions and margin usage. Leverage magnifies both profits and losses, and small adverse moves when margin is tight can trigger margin calls or automatic position closures by your broker. Swap, commission and other broker fees also affect your account and may be applied in ways that differ between brokers. This article is educational and not personalised advice; consider practising on a demo account and, if necessary, seek independent financial advice before trading real money.
Key Takeaways
- Balance is the cash in your account after closed trades, while equity equals balance plus or minus unrealised P/L from open positions.
- Margin and free margin determine how much you can open and how much buffer you have; leverage increases both opportunity and risk.
- Treat unrealised profits as provisional until they are closed and realised; manage position size relative to balance to protect capital.
- Trading carries risk; never trade with money you cannot afford to lose and do not take this as personalised advice.
References
- https://greenup24.com/blog/an-introduction-to-the-concept-of-balance-in-forex-trading
- https://www.forextime.com/education/videos/what-is-your-balance
- https://blueberrymarkets.com/academy/how-to-trade-with-the-on-balance-volume-indicator/
- https://www.babypips.com/learn/forex/what-is-account-balance
- https://fenefx.com/en/blog/meaning-of-balance-in-forex/
- https://beirmancapital.com/equity-vs-power-balance-why-equity-is-more-important-in-forex/
- https://www.axiory.com/trading-resources/basics/what-is-balance-of-trade
- https://mondfx.com/what-is-equity/