What is equity?
Equity is the value of a trading account with open positions included, unlike balance which counts only closed trades. Most prop firms calculate their risk limits on equity.
The distinction between balance and equity looks technical, but it decides whether an account survives.
The difference
Balance counts only closed trades. It does not move while a position stays open, whatever that position is doing.
Equity adds the unrealised result of open positions to the balance. An account with a $100,000 balance holding a position $3,000 in unrealised loss shows equity of $97,000.
Why firms use it
Measuring risk on equity lets the firm react before a position is closed, and therefore before the loss becomes final. That is coherent from its point of view, but it means a position temporarily in loss can fail an account even though it would have ended up winning.
This is the mechanism behind most eliminations that feel unfair: the trader was right about direction, but the account touched the floor during the move against them.
The practical consequences
Three adaptations follow. Position sizing must account for the maximum adverse excursion you expect, not just the stop-loss. Leaving several positions open at once stacks unrealised losses against a single limit. And a position held overnight is exposed to an opening gap that can cross the floor before any decision is possible.
A few rare firms calculate their limits on balance alone. That is a substantial advantage, particularly for swing trading approaches, and it is worth looking for explicitly in the terms and conditions.
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Related terms
- Breach A breach is the violation of a risk rule that triggers a sanction on the account. Depending on the firm and the rule involved, it suspends the trading day, cancels a payout, or closes the account for good.
- Daily loss limit A daily loss limit is the maximum loss allowed on a single trading day. Separate from total drawdown, it resets each day and breaching it means, depending on the firm, the day is suspended or the account is closed.
- Drawdown Drawdown is the maximum loss allowed on a prop firm account before it is closed. It is expressed as a percentage or a fixed amount, and calculated under three models — static, end-of-day trailing or intraday trailing — with very different consequences.
- Trailing drawdown A trailing drawdown is a loss limit that follows the account's gains upward: every new high raises the floor the account must not fall below. It exists in an end-of-day form and a far stricter intraday form.