What is Unrealized P/L and Floating P/L?
In your trading software, you might encounter terms like “Unrealized P/L” or “Floating P/L” with varying positive or negative figures. Here’s what they mean:
1. Unrealized P/L or Floating P/L:
- This refers to the gains or losses on your trades that are still open and haven’t been finalized.
- The value of these open positions can go up or down based on market fluctuations.
- For instance, imagine you started a trade with a profit. If market conditions change unfavorably, this could quickly transform into a loss unless you decide to close the trade.
Example: Suppose you buy 10,000 units of EUR/USD at 1.15000. If the current exchange rate drops to 1.13000, your Floating P/L would be:
Floating P/L = 10,000 x (1.13000 – 1.15000) = -200 pips (where each pip is worth $1), resulting in a floating loss of $200.
But if the rate goes up to 1.16000, your Floating P/L would be:
Floating P/L = 10,000 x (1.16000 – 1.15000) = 100 pips, resulting in a floating profit of $100.
2. Realized P/L:
- This is the profit or loss you’ve locked in by closing a trade.
- Once you close a position, the gain or loss becomes “realized”, and it directly affects your account balance.
- For instance, if you close the above trade with a $200 loss, your account balance would decrease by $200.
- Conversely, if you close with a $100 gain, your balance would increase by that amount.
Key Takeaways:
- Unrealized profit, sometimes called “paper profit,” represents the potential gains on a trade. However, these gains can vanish if market conditions shift against your position.
- Only by closing a position can you “realize” the profit or loss. Once realized, this amount is reflected in your account balance and is not affected by future market changes.
- Realized profits can be cashed out and added to your account, whereas unrealized profits remain theoretical until the trade is closed.
In the trading world, the difference between “realized” and “unrealized” profit/loss can determine the outcome of a trade. It’s crucial to know the distinction to manage trades effectively.
Tag:Floating P/L, forex, Unrealized P/L