Balance, Equity and Free Margin: what each one means

Open MT4 or MT5 and the bottom bar shows four numbers: Balance, Equity, Margin, Free
Margin. Most beginners read only the first one, and that is why they get stopped out
without understanding what happened.

Four numbers, one worked example

Say you deposited $2,000 and hold one position currently down $150, tying up $400 of margin:

Why reading Balance is dangerous

Balance does not move while a position is open. An account in deep drawdown
still displays the same tidy figure it had on deposit day. The only number that reflects reality is
Equity, and it moves with every tick.

This is why so many traders are blindsided by an automatic close-out: they were looking at 2,000
while Equity had fallen to 500.

Margin level — the number that decides it

Your broker does not watch those four figures. It watches the ratio between two of them:

Margin level (%) = Equity ÷ Margin × 100

In the example: 1,850 ÷ 400 × 100 = 462%. Most brokers issue a margin call near
100% and stop out somewhere between 20% and 50%.
The figure sits right there on the platform, and it is worth watching more closely than your
P&L.

Three common misreadings

• “I have $1,450 free, so I can lose $1,450.” Not quite — you are stopped out
  before Free Margin reaches zero, at whatever level your broker sets.
• “Closing a position raises Equity.” It does not. Closing moves P&L from
  Equity into Balance; Equity is unchanged. What rises is Free Margin, because the held
  margin is released.
• “My balance doesn’t match the profit I saw.” Correct, because
  commission and
  swap are deducted on close and do not appear in
  the running P&L.

The habit to build

Before opening anything, look at Free Margin, not Balance. And
size the position from your risk percentage
using Equity, because that is the capital you actually have.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.