Understanding Unrealized P/L and Floating P/L

On your trading platform, you'll often encounter terms like "Unrealized P/L" or "Floating P/L," accompanied by numbers in either green or red. In this lesson, we'll clarify what Unrealized P/L and Floating P/L mean.

In the realm of trading, there are actually two distinct types of "profit or loss," commonly abbreviated as "P/L." Both are significant, so let's delve into the distinctions between them.

Unrealized P/L

Unrealized P/L pertains to the profit or loss associated with your current open positions—essentially, the trades you presently have active. It represents the profit or loss you would realize if you were to close all your open positions immediately.

Unrealized P/L is also known as "Floating P/L" because its value is in constant flux. This is because it is tied to the current market prices, and as long as your positions remain open, your Unrealized P/L continuously fluctuates or "floats."

For instance, if you currently hold an unrealized profit, a change in price against your position can transform that unrealized profit into an unrealized loss.

Example: Floating Loss

Suppose your trading account is denominated in USD, and you currently hold a long position of 10,000 units of EUR/USD, which you purchased at a rate of 1.15000. The current exchange rate for EUR/USD is 1.13000.

Now, let's calculate the position's Floating P/L:

The position currently shows a loss of 200 pips. Given that you are trading a mini lot, the value of each pip amounts to $1. Therefore, your present situation entails a Floating Loss of $200 (calculated as 200 pips x $1).

This loss is termed "Floating" because you have not yet closed the trade. Typically, when a loss remains floating, traders are optimistic that the price will reverse in their favor. If, for instance, EUR/USD were to rise above your initial entry price and reach 1.16000, you would then find yourself with a Floating Profit.

In this scenario, the position is currently showing a gain of 100 pips, and since you're trading a mini lot, each pip is valued at $1. Consequently, you would have a Floating Profit of $100 (calculated as 100 pips x $1).

Realized P/L

A Realized Profit represents the profit earned from a trade that has been successfully completed. Similarly, a Realized Loss signifies a loss incurred from a trade that has been completed. In essence, your profits or losses are only realized when you close your positions.

This is the pivotal moment when your account balance is adjusted to reflect any gains or losses. If you close a position with profits, your account balance will increase accordingly. Conversely, if you conclude a trade with losses, your account balance will decrease.

Example: Realized Loss

Suppose your trading account is in USD, and you currently hold a long position of 10,000 units of EUR/USD, which you acquired at a rate of 1.15000. The current exchange rate for EUR/USD stands at 1.13000. Now, let's calculate the position's Floating P/L:

The position currently shows a loss of 200 pips, and given that you're trading a mini lot, each pip carries a value of $1. Consequently, you have a Floating Loss of $200 (calculated as 200 pips x $1). This loss remains "floating" because you have yet to close the trade.

However, unable to tolerate further losses, you decide to close the trade immediately. At this point, you realize the $200 loss, which is then deducted from your account balance.

When you initially opened the trade, your Balance stood at $1,000. However, after closing the trade with a $200 loss, your Balance is now reduced to $800.

Example: Realized Profit

Imagine your trading account is in USD, and you currently hold a long position of 10,000 units of EUR/USD, which you purchased at a rate of 1.15000. The current exchange rate for EUR/USD is now 1.16000.

Let's calculate the position's Floating P/L:

The position currently reflects a gain of 100 pips, and considering your trade size is a mini lot, each pip translates to a value of $1. As a result, you currently hold a Floating Profit of $100 (calculated as 100 pips x $1). This profit remains "floating" because you have yet to close the trade.

Suddenly, you hear a voice advising you to exit your trade, prompting you to take action. You proceed to close the trade, realizing the $100 gain, which is then added to your account balance.

At the time you initiated the trade, your Balance stood at $1,000. However, after closing the trade with a $100 gain, your Balance has now increased to $1,100.

Profit Only Counts When It's in Hand

The distinction between realized and unrealized profit may seem subtle, but it can determine whether a trade is profitable or not. Traders must be crystal clear about differentiating between "realized" P/L and "unrealized" P/L.

• Realized profits represent gains that have been converted into cash and added to your account balance.

• Realized losses denote losses that have been converted into cash and deducted from your account balance.

In simpler terms, to realize profits from a trade you've made, you must receive actual cash, not just watch the value of your trade increase without closing the trade.

Unrealized profit, on the other hand, is theoretical profit or "paper profit" that is currently available but can be taken away if the price moves against the trade. Think of it like the love that got away in your personal life – the one you never mustered the courage to propose to, and now you're left with a "realized" loss of the perfect partner. It's a lesson that applies directly to trading, much like Bob's unfortunate love story. Bob, to this day, remains single.

The poignant lesson from Bob's love life can be applied to trading. If you haven't closed your position and "realized" your gains, you could still lose some or all of your profits. Realized profit, in contrast, is genuine profit no longer influenced by price fluctuations because it is no longer part of an active trade. It's real money that's added to your Balance and can be withdrawn from your trading account and transferred into your bank account.