Equity and its use in Forex trading.
In the foreign exchange market one can come across the term “equity” (or equity), which novice traders do not understand so well. Those who are engaged in testing strategies or advisers are familiar with it . It’s time to consider this concept, where it is used.
Our task is divided into several sub-questions:
- What is Forex equity?
- How will knowledge of equity help us?
- Equity curve when analyzing strategies
Equity is the value that characterizes a trading account based on the balance calculated in the currency of the security deposit. This takes into account open positions. In other words, it is a balance plus current positions, plus a swap, and if simplified even more, this is the real amount in the account at the current time.
Consider an example. Suppose a trader replenished an account with $ 3 thousand. A few days after an unsuccessful entry into the market, a negative transaction of $ 610 appeared. Hence, the equity is calculated as 3000 – 600 = 2390 USD. This amount is available to the trader at the moment, no more. If there is a change of trend and the deal goes into a plus, then we can talk about increasing equity.
What Equity Gives Us
The value of equity is very helpful when using all sorts of tests of trading strategies, as well as in their development. By tracking the trend of this indicator, you determine the quality of trade and can make timely decisions to enter the market.
Equity = balance + current profit – current loss.
As already noted, we take into account the deals opened at the moment.
Example. The trader made a deposit of $ 2000 and opened 3 deals. On the first, there is a loss of $ 40, on the other, too, they went down to minus $ 210, and the third position goes to plus on $ 150. Total equity = 2000 – 40 – 210 + 150 = 1900 USD.
By the way, do not forget that this is a dynamic indicator, not a static.
Where to find
If you trade through the MetaTrader 4 platform , you can look at the equity at the top of the terminal – go to the “Assets” tab. During trading, the balance can be viewed on the “Trade” tab; this will serve as a guideline for further actions.
If there is a desire to monitor equity in real time, you can put the corresponding indicator to display it. What is it for? If you conduct multi-trading with simultaneous observation of several charts, you need to respond to strong equity jumps as quickly as possible.
The usefulness of this indicator is important when testing and creating both trading strategies and robots. The equity change graph will be a good indicator of the quality of the system being studied. It allows you to consider drawdowns, assess the risks and profitability of the strategy.
Equity fluctuations when testing strategies
By examining the equity change scheme, one can draw conclusions about the quality of a trading strategy, how profitable it is, what level of sustainability.
Do not forget that the equity curve should ideally be a straight growing line, without jumps.
You can argue: “But it often happens that with tests, the graph shows an increase of 2 times!”.
Yes, but keep in mind that such a picture indicates the enormous risks present in your vehicle. The equity curve is a reflection of the strategy used. If the curve is linear, then the vehicle will be stable for any changes in the market situation, as a result, you do not expose your deposit to high risk. Because it is better to have many small and frequent profitable deals than rare large ones.
With the help of the equity curve, you can identify the moment when it is better to stop working on this system – this is a downward curving of the chart, signaling an upcoming decrease in the trading account.
Equity-indicator will provide information about the status of your deposit. You can also view data for a selected period of time. In other words, you can observe the effectiveness of your activities in the foreign exchange market. Using the indicator, you can see the equity for different currency pairs and calculate the efficiency of the vehicle.
A number of parameters of this indicator allows you to analyze the effectiveness of trading operations for a selected period of time:
- Only Trade – characterizes the initial balance, account replenishment and withdrawals.
- Show Info – characterizes the recovery taking into account subsidence.
- File_Write – allows you to connect additional equity analysis software.
If necessary, you can activate the option in which only those orders that you consider important will be taken into account.