You will see something in your trading platform that says “Unrealized P/L” or “Floating P/L” with green or red numbers beside it.
In this lesson, we will define Unrealized P/L and Floating P/L.
When it comes to trading, there are two forms of “profit or loss,” often known as “P/L.”
Both are critical. Let us examine the distinction between the two.
Unrealized P/L
The profit or loss held in your current open positions….your currently active trades…is referred to as unrealized P/L.
This is the profit or loss that would be “realized” if all of your open positions were instantly closed.
Unrealized profit/loss is sometimes known as “floating profit/loss” because the value changes all the time while your positions are still open.
If you have open positions, your unrealized P/L swings (or “floats”) with the current market values.
For example, if you currently have an unrealized profit, if the market moves against you, the unrealized profit can turn into an unrealized loss.
Example: Floating Loss
Assume your account is in USD and you are currently long 10,000 EUR/USD units purchased at 1.15000.
The current EUR/USD exchange rate is 1.13000.
Let’s figure out the position’s Floating P/L:
The trade is down 200 pips.
Because you’re trading a tiny lot, each pip is worth $1.
So you currently have a Floating Loss of $200 (200 pips x $1).
Because you have not yet concluded the trade, it is a Floating Loss.
When a loss continues floating, you usually hope that the price will recover.
If the EUR/USD increased over your initial entry price to 1.16000, you would have a Floating Profit.
The position has now gained 100 pips. Because you’re trading a tiny lot, each pip is worth one dollar.
So you currently have a $100 Floating Profit (100 pips x $1).
Realized P/L
A realized profit is a profit from a completed trade.
The same is applicable to a loss.
A realized loss is a loss that results from a completed transaction.
In other words, your profits or losses are realized only once the positions are CLOSED. Your account balance will only update to reflect any wins or losses at this time.
If you closed a profitable trade, your account balance will rise. If you closed with a loss, your account balance would be reduced.
Example: Realized Loss
Assume your account is in USD and you are currently long 10,000 EUR/USD units purchased at 1.15000.
The current EUR/USD exchange rate is 1.13000.
Let’s figure out the position’s Floating P/L:
The trade is down 200 pips.
Because you’re trading a tiny lot, each pip is worth one dollar.
As a result, your current Floating Loss is $200 (200 pips x $1).
Because you have not yet concluded the trade, it is a floating loss.
But you can’t take any more losses and decide to exit the deal right away.
You’ve realized your $200 loss, and the money has been DEDUCTED from your account balance.
When you started the trade, your balance was $1,000.
However, because you lost $200 on the trade, your Balance is now $800.
Example: Realized Profit
Assume your account is in USD and you are currently long 10,000 EUR/USD units purchased at 1.15000.
The current EUR/USD exchange rate is 1.16000.
Let’s figure out the position’s Floating P/L:
The position has gained 100 pips.
Because you’re trading a tiny lot, each pip is worth one dollar.
So you currently have a $100 Floating Profit (100 pips x $1).
It is a floating profit because you have NOT finalized the trade yet.
You hear a voice from nowhere telling you to stop trading.
So you finish the transaction.
You’ve realized the $100 profit, and the money has been ADDED to your account balance.
When you started the trade, your balance was $1,000.
However, because you concluded the trade with a $100 profit, your Balance is now $1,100.
Profit does not exist until it is Realized
Although the distinction between realized and unrealized profit is minor, it might be the difference between a lucrative and a losing trade.
It is critical for traders to understand the difference between “realized” and “unrealized” profit/loss.
- Profits that have been turned into cash and ADDED to your account balance are referred to as realized profits.
- Losses that have been turned into cash and DEDUCTED from your account balance are known as realized losses.
In other words, in order to profit from a trade, you must get cash rather than simply seeing the value of your transaction rise without abandoning the trade. Unrealized profit is speculative profit or “paper profit” that is currently available but could be taken away at any time if the price of the deal swings against it.
You could still lose some or all of your profits if you have not closed out of your position and “realized” your gain.
Because it is no longer part of an active deal, realized profit is real profit that is no longer impacted by price movements.
It is actual money that is added to your Balance and may be withdrawn and transferred from your trading account into your bank account.
