Module 3: The Trader's Language · Lesson 19/40
9 min 60 XP
Two numbers look similar and are constantly confused. Balance is your settled cash — what the account is worth when no trade is open. Equity is the live value *right now*: balance plus or minus the floating (unrealized) P/L of every open position. With trades running, equity moves tick by tick while balance sits still. Equity is the real number; it is what the broker uses for everything that matters.
Balance
Equity
Equity
Equity = Balance + floating P/L
Balance $1,000, an open trade currently −$120 → equity = $880. Close it and the balance becomes $880.
When you open a trade the broker locks part of your equity as used margin (collateral). What is left for new trades and for absorbing losses is free margin. The health gauge is the margin level = equity ÷ used margin × 100%. As losses shrink equity, this falls.
Margin call & stop-out
Around a 100% margin level the broker sends a margin call — a warning that you are low on free margin. If equity keeps falling to the stop-out level (often ~50%), the broker force-closes your positions automatically, at the worst possible moment. You never want to meet either one.
Drawdown is the drop from an equity peak down to a later trough, measured in percent or money. Your current drawdown is how far you are below your last high-water mark; your maximum drawdown is the largest peak-to-trough fall you have ever suffered. Max drawdown is the honest measure of a strategy’s pain — far more telling than its best month.
Why drawdown is brutal: the recovery math
Losses and gains are not symmetric. A −10% drawdown needs +11% to recover. A −50% drawdown needs +100%. A −90% drawdown needs +900%. The deeper you fall, the exponentially harder it is to climb back — which is the whole reason professionals protect against drawdown obsessively.
Recovery needed
Gain to recover = 1 ÷ (1 − drawdown) − 1
Down 50% (0.50): 1 ÷ (1 − 0.50) − 1 = 1.00 = +100% just to get back to even.