Balance: what is already closed
Balance is the money in the account counting only trades that have been closed, plus deposits and withdrawals. When a trade closes in profit, balance goes up. When it closes at a loss, balance goes down. A trade that is still open does not touch it at all.
That makes balance a record of the past. It is useful, but it can be steered: a strategy that closes winners quickly and leaves losers open will show a balance that only ever goes up, for a while.
Equity: what you would have now
Equity is balance plus the profit or loss of every open trade, at current prices. It is what the account would hold if you closed everything this second.
When equity is far below balance, the account is carrying losses it has not taken yet. Grid and martingale EAs are the classic case. They add positions as the price moves against them and wait for a bounce. Most days the bounce comes, the trades close in profit, and balance climbs again. On the day it does not, equity has been showing the risk all along.
Here is a made-up example. An EA's balance has risen month after month to 10,000. It has several positions open against the trend, with a floating loss of 3,000. Equity is 7,000. A balance chart shows a strategy that never loses; the equity chart shows an account 30% down.
Drawdown: how deep it has been
Drawdown measures how far the account has fallen from its best point so far. The most useful version is maximum drawdown: the deepest fall over the whole history.
It should be measured on equity, for the reason above, and on NAV per unit rather than raw equity, so deposits and withdrawals do not hide or invent falls. NAV per unit, explained shows how.
Maximum drawdown is the number most screenshots leave out. It is also the one that tells you whether you could live with the strategy: a 40% maximum drawdown means that at some point, almost half the money was gone, whatever the final balance says.
Reading the three together
- Balance rising, equity close to it: the strategy takes its losses as it goes. What you see is roughly what you have.
- Balance rising, equity far below: losses are being carried, not taken. Ask how deep equity has gone, and how often.
- A small maximum drawdown over a short history: promising, but not proof. Rare bad days need time to show up.
- Return quoted without drawdown: half the story. A high return with a deep drawdown is a bet, not a track record.
One more thing to know about any chart of equity: it is only as fine-grained as its readings. A reading every minute will miss a dip that came and went within that minute.
In Quantrivance
Equity first, on every account
Quantrivance records each account's balance and equity once a minute and works out drawdown from equity, on NAV per unit. The Portfolio page shows them for all your accounts together and each account's page shows its own, so a smooth balance cannot hide a deep fall.
This post is for education and is not investment advice. Examples use made-up figures, not anyone’s results. Trading carries risk.