In trading, the term “balance” refers to the amount of cash available in a trading account, excluding any unrealized profits or losses from open positions. It is essentially the starting point for understanding your account’s financial health before factoring in the current market movements affecting your trades. Knowing your balance helps you manage risk, plan new trades, and understand how much capital you have free to deploy.

To put it simply, the balance is the amount of money you have after all closed trades have been accounted for, plus any deposits or withdrawals. It does not include the fluctuating value of open positions, which are reflected separately in metrics like equity or margin.

Formula:
Balance = Previous Balance + Realized Profit/Loss + Deposits – Withdrawals

For example, suppose you start with $10,000 in your trading account. You make a few trades and close them with a total profit of $500. You also deposit an additional $1,000 into your account. Your new balance would be:

Balance = $10,000 + $500 + $1,000 – $0 = $11,500

If you then open a position that currently shows an unrealized loss of $200, your balance remains $11,500, but your equity (which includes unrealized P/L) would be $11,300.

A real-life example might involve trading forex (FX). Imagine you have $5,000 in your account. You enter a long position on EUR/USD, and while the trade is open, the price moves against you showing an unrealized loss of $150. Despite this, your balance remains $5,000 because the loss is unrealized. If you were to close the trade at this point, the $150 loss would become realized, and your balance would decrease to $4,850.

One common misconception is confusing balance with equity. Equity reflects your real-time account value and includes your balance plus any unrealized profits or losses. Many traders check their balance and assume it shows their full account value, which can be misleading if they have open trades that are currently losing money. This misunderstanding can lead to over-leveraging or thinking there is more capital available than there actually is.

Another frequent question traders ask is: “What’s the difference between balance and margin?” Margin refers to the amount of money required to open and maintain positions, and it’s often a portion of your balance that is “locked” or set aside to cover potential losses. Your balance is the total cash excluding unrealized gains or losses, while margin is the subset of your funds allocated to keep trades open.

Also, traders often wonder how withdrawals impact balance. When you withdraw funds from your account, the balance decreases accordingly. However, withdrawing too much can reduce your margin cushion, increasing the risk of margin calls if your open positions move against you.

In summary, understanding balance is fundamental to effective trading. It represents your cash on hand, unaffected by market fluctuations on open trades. Always consider balance alongside equity and margin to get a complete picture of your trading account’s status. Recognizing the difference between realized and unrealized P/L helps avoid mistakes such as overestimating your available funds or mismanaging risk.