/L stands for Profit or Loss and it is the main thing every trader is concerned about. In this chapter we will review how it is important to make a difference between Realized and Unrealized P/L.
Unrealized P/L reflects the profit or loss of all your open positions. It shows the profit or loss you will make if you close all positions at the exact moment.
Another name for Unrealized P/L is “Floating P/L”, and as its name suggests it is because the P/L is constantly “float” (or change) after opening a position.
In other words, your unrealized P/L changes with the market prices movement.
For instance, if you have opened a position and the market moved against you this means that you will have an unrealized loss, but if you wait long enough and the market goes in your favor your unrealized loss will become unrealized profit.
Let’s look at the following example.
You have a GBP account and have bought 10,000 units GBP/USD at 1.3700. At the moment the exchange changed to 1.3600.
In this case, you will have:
Floating P/L = 10,000 x (1.3600 – 1.3700)
-100 = 10,000 x (- 0.0100)
Your position is now 100 pips down.
Because you are trading a mini lot, this means that each pip is worth $1, so now your unrealized/floating loss is $100 (100 pips x $1).
As we said previously, your loss is still floating because the trade isn’t closed yet. If you keep your position and the price of GBP/USD goes up to let’s say 1.3900 then your Floating Loss will change to Floating Profit.
Your position is now 200 pips up than your initial position.
Again, you are trading a mini lot, so each pip is worth $1 and now you have a Floating Profit of $200 (200 pips x $1).
After closing a position and your trade is completed your Unrealized Profit becomes Realized Profit. And same with a loss, your Unrealized Loss becomes Realized Loss. So, in short, your profits or losses become realized only after the position is closed.
After closing your position your account balance will change and will reflect the gains or losses.
If we take a look again at the above examples in the first scenario where our position went 100 pips down with a Floating Loss of $100, this means that closing the order at this rate will turn the $100 Floating Loss into a Realized Loss and $100 will be deducted from our account balance. So, if our account balance was $5,000 it will now be $4,900.
Same, but in the other direction will happen, if we close our position while we have a Floating Profit. Again, looking at the mentioned examples, we are closing our position with 200 pips up and a Realized Profit of $200 which will lead to increasing our account balance from $5,000 to $5,200.
So, let’s remember – Profit isn’t real until it is Realized. Same with Loss.
Watch out for your Unrealized P/L and choose the right time to Realize it!