What are Floating P/L and Unrealized P/L?

You will notice the terms "Unrealized P/L" or "Floating P/L" in your trading platform, along with red or green numbers. We define Unrealized P/L and Floating P/L in this lecture.

July 25, 2022 - 03:56 PM 299 views

What are Floating P/L and Unrealized P/L?

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You will notice the terms "Unrealized P/L" or "Floating P/L" in your trading platform, along with red or green numbers.

We define Unrealized P/L and Floating P/L in this lecture.

There are actually two different kinds of "profit or loss," or "P/L," in trading.

Both are crucial. Let's talk about how they differ from one another.

Unrealized P/L

Unrealized P/L is the profit or loss that is still accounted for in your open trades and open positions at the moment.

When all of your open positions are instantly closed, this is equivalent to the gain or loss that would be "realised."

Since your positions are still open, unrealized profit and loss is also referred to as "Floating P/L" because the value is always fluctuating.

If you have open positions, your unrealized P/L continuously varies (or "floats") with the prevailing market values.

For instance, if prices change against you, an unrealized profit that you currently enjoy could turn into an unrealized loss.

Example: Floating Loss

Let's imagine you have a USD-denominated account and are now long 10,000 EUR/USD units that you purchased at 1.15000.

The current EUR/USD exchange rate is 1.13000.

Let's figure out the Floating P/L for the position:

Floating P/L = Position Size x (Current Price - Entry Price)

Floating P/L = 10,000 x (1.13000 - 1.15000) -200 = 10,000 x (- 0.0200)

200 PIP are lost on the situation.

Each pip costs $1 as you're trading a tiny lot.

As a result, you currently have a $200 floating loss (200 pip loss times $1).

Due to the fact that you have not yet concluded the trade, it is a floating loss.

Typically, you are expecting for a price reversal when a loss is still floating.

You would now have a Floating Profit if the EUR/USD price increased to 1.16000 from your initial entry price.

Now, the position has gained 100 pip.

Each pip costs $1 as you're trading a tiny lot.

As a result, your current floating profit is $100 (100 pip times $1).

Realized P/L             

Profit from a closed trade is referred to as a realised profit.

Similarly if you lose.

A loss that results from a closed trade is known as a realised loss.

In other words, you don't actually realise your gains or losses until after the positions are CLOSED.

Your account balance will only change to reflect profits or losses at this specific time.

Your account balance will rise if you closed a position with profits. Your account balance will drop if you closed with losses.

Example: Realized Loss

Let's imagine you have a USD-denominated account and are now long 10,000 EUR/USD units that you purchased at 1.15000.

The current EUR/USD exchange rate is 1.13000.

Let's figure out the Floating P/L for the position:

Floating P/L = Position Size x (Current Price - Entry Price) 

Floating P/L = 10,000 x (1.13000 - 1.15000)   -200 = 10,000 x (- 0.0200)

200 pip are lost on the situation.

Additionally, each pip is worth $1 as you are trading a tiny lot.

As a result, you currently have a $200 floating loss (200 pip loss times $1).

Due to the fact that you have not yet concluded the trade, it is a floating loss.

But you decide to close the transaction right away since you can't take losing any longer.

The $200 loss has been realised and the money has been DEDUCTED from your account balance.

You started the trade with a balance of $1,000.

Your Balance is now $800 yet you concluded the trade with a $200 loss. 

Example: Realized Profit

Suppose you have a USD-denominated account and are now long 10,000 EUR/USD units that you purchased at 1.15000.

The current EUR/USD exchange rate is 1.16000.

Let's figure out the Floating P/L for the position:

Floating P/L = Position Size x (Current Price - Entry Price) 

Floating P/L = 10,000 x (1.16000 - 1.15000)   100 = 10,000 x (0.0100)

The trade has gained 100 pip.

Additionally, each pip is worth $1 as you are trading a tiny lot.

As a result, your current floating profit is $100 (100 pip times $1).

Due to the fact that you have not yet finished the trade, it is a floating profit.

You suddenly hear a voice telling you to stop your exchange.

The trade is so closed.

The $100 gain has been realised and the money has been added to your account balance.

You started the trade with a balance of $1,000.

However, your Balance has increased to $1,100 when you concluded the trade with a $100 profit.

 

Balance

Floating P/L

BEFORE

$1,000

+$100

AFTER

$1,100

-

Profit Isn’t Real until It’s Realized

Although the distinction between realised and unrealized profit is minor, it has the potential to make or break an investment.

It is crucial that traders understand the differences between "realised" and "unrealized" P/L.

Gains that have been turned into money and ADDED to your account balance are known as realised profits.

Losses that have been turned into cash and DEDUCTED from your account balance are referred to as realized losses.

In other words, you must receive money from a transaction you made in order to earn profits from it. You cannot merely watch your trade's value rise without closing it.

Unrealized profit, sometimes known as "paper profit," is money that is currently available but that, in the event that the market moves against the deal, could be taken away at any time.

You could still lose some or all of your earnings if you haven't "realised" your gain by closing out of your trade.

Realized profit is actual money that has been earned but is no longer subject to price fluctuations because it is no longer a component of an open deal.

Your Balance is increased with actual money that may be taken out of your trading account and deposited into your bank account.

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