When trading, you will be putting aside sufficient funds to cover your investment plus whatever losses you may incur – your required and used margin. From that point on, you shouldn’t be looking at your balance anymore but at your equity – what your account is worth. Your balance is what you have when all your positions are closed after adding profits on closed positions and deducting losses and overnight swaps.

Your equity is the same but with the positions still open. And because those positions are opened, and because they’re all the time changing, so is your equity. THAT’s the bottom line you should be looking at.

So let’s look at that a little closer: Here’s your money. Your balance the moment after you invested, say, $1000 in your account. Here’s your broker’s money. He has a little more than you because he has access to huge liquidity providers. Those are the big banks and financial institutions that underwrite the investment industry.

Now, you read in the papers that Kuwait has closed down its oilfields and because of a drop in supply, prices are going to rise.

As a result, you opened a $200 CALL position on Oil at $57. That was the BID price. You’re getting 10 to 1 leverage, which translates into 10% required margin. Now here’s what happened. The broker opened that $200 position at the broker’s ask price of 57.440.

The moment you open that position, your balance gets divided into free margin and used & required margin. $20, that’s 10% of the position, gets put aside in the required margin leaving you $980 free. Now, if you were to immediately CLOSE that position, you’d be closing it at the BID price – 57.430, which is lower. Remember? Your broker charges you the spread. So, you’re opening the position at a loss of 1 cent on the barrel. Now, your position was $200 or roughly 3½ barrels, meaning, you’re down 3½ cents.

That’s your used margin – what you put aside to cover losses and it is ALSO deducted from your free margin.

Note! Your balance is still $1000. But it’s now irrelevant.

Now, oil breaks out and continues all the way to $58.735. That’s a $1.305 profit on the barrel, and you’ve got 3½, meaning just over $4½ profit. That get’s subtracted from your used margin or – if you will – added to your equity, which you can see is now higher than your balance. You’re worth more than what you were a moment ago. But THAT won’t happen until you close that position. Then, the required margin is returned and your equity becomes your balance.

Now, there’s just one more thing we should mention before we go and that’s equity at hand. It’s what we need to compute before withdrawing funds, and it’s what you should be doing with your profits on a regular basis. But you needn’t close all your open position just because you’re in profit. The formula’s quite simple. You have your balance and you subtract from that the required margin to keep all open positions open. Subtract the losses on all LOSING positions, add your profits from open PROFITABLE positions, subtract swaps – that’s the charge for keeping positions open overnight, and subtract another 25% safety margin. $707: that’s the maximum amount you can safely withdraw, but it doesn’t leave any aside for opening NEW positions.