Equity
Equity is the current value of a trading account: balance plus the floating profit or loss on open positions. With nothing open, equity equals balance.
Balance changes only when trades close or funds move; equity moves with every tick while positions are open. A balance of $10,000 with an open trade at −$150 means equity of $9,850. Close the trade and the balance becomes $9,850, with floating P&L back at zero.
Equity also drives margin arithmetic: free margin is equity minus used margin, and margin level is equity divided by used margin. A large floating loss quietly shrinks the room you have to hold anything else.
Example
Balance $10,000, daily loss limit $500 (5%). You are long one lot of EURUSD and price is 45 pips against you: floating P&L is −$450 and equity is $9,550. The day's remaining room is $50 — five more pips against the position, whether or not you ever close it.
In a prop-firm challenge
Most firms measure their rules on equity, not balance. A daily loss limit can be breached by an open position's floating loss even if you never close the trade, and trailing drawdown models typically follow peak equity. Watching your balance while the rules watch your equity is a common way to be surprised by a breach; the main variants are mapped in drawdown types explained.