Who this is for — Anyone who must decide which account value to use for risk and what part of their wealth can genuinely be exposed to losses.
In trading, balance, equity and risk capital are not synonyms. The exact meaning of the first two labels depends on the intermediary, product and accounting rules; the account statement and platform specifications must be checked before either value is used.
- Balance is generally an accounting value reflecting cash, deposits, withdrawals and realized results. Open positions may not enter it until they are closed or settled.
- Equity is the account's current value after adjustments for open positions and other components specified by the contract. The CFTC, for example, describes retail forex obligations as including funds, property and realized and unrealized profit or loss.
- Risk capital is a personal economic decision: the portion that can be lost without impairing essential expenses, safety savings or other goals. It does not necessarily equal either balance or total equity.
Three measures, three decisions
Which value belongs in the plan
The plan should state the basis used to calculate risk per trade: current equity, end-of-day balance or another defined measure. Changing the basis after a loss or while a position is open makes comparisons and limits inconsistent.
| Control | Documentable question |
|---|---|
| Calculation base | Which statement field do I use, and when do I record it? |
| Risk capital | What amount remains excluded because it serves essential needs? |
| Exposure | How much capital is already committed or vulnerable in open positions? |
| Update |
Purely illustrative example: an account may show a balance of 10,000 and, with an open loss of 300, equity of 9,700 before other adjustments. If only 2,500 has been classified as risk capital, that does not authorise risking 2,500 on one trade: the per-trade budget is a separate limit.
Limit — Equity and balance can change because of prices, costs, interest, currency conversion, margin and intermediary rules. Risk capital narrows the economic scope of a loss but does not prevent losses from exceeding expectations.
Sources
- CFTC, description of financial report data fields — net liquidating equity and retail forex funds adjusted for realized and unrealized profit and loss.
- CFTC, Forex Frauds — prudent definition of risk capital and separation from money needed for living expenses and savings.
- Investor.gov, Understanding Margin Accounts — margin-account equity, debt to the intermediary and the risk of calls or liquidation.