In trading, understanding the difference between unrealized and realized P/L is essential for managing your positions and assessing your account's performance. This post will cover:

• Definition of Unrealized (Floating) P/L and Realized P/L: Unrealized (floating) P/L refers to the profit or loss from open positions, while realized P/L reflects the profit or loss from positions that have been closed.

• Relationship Among Unrealized and Realized P/L, Balance, and Equity: Your account balance is updated based on realized P/L, deposits, withdrawals, and swap fees, while equity reflects the balance combined with unrealized P/L.

• The Importance of Unrealized P/L: Monitoring unrealized P/L is vital for making informed trading decisions and ensuring you maintain sufficient margin.

What is Unrealized (Floating) P/L and Realized P/L?

Unrealized P/L (also known as floating P/L) refers to the profit or loss from your open positions or active trades. It represents the gains or losses you would have if you were to close all your open positions at the current market prices. Since the market is constantly moving, your unrealized P/L fluctuates along with the prices of the assets in your open positions.

On the other hand, realized P/L is the profit or loss from trades that have already been completed, i.e., positions that have been closed. Your profits or losses are only “realized” when you close a position.

How are Unrealized P/L and Realized P/L Presented?

Unrealized P/L is reflected in equity, while realized P/L is shown in your balance.

What is Balance

To start trading, you first deposit money into your account. This initial deposit becomes your balance. For example, if you deposit $100, your balance is $100. Your balance remains unchanged when you open a new position. It only updates when one the following occurs:

• You add or withdraw funds.

• You close a position (when your P/L is realized).

• A swap fee (interest for holding position overnight) is charged. (We’ll discuss swap in a future post—just note for now that they're the cost of borrowing money from your broker and are deducted from your balance.)

What is Equity?

Equity is the sum of your account balance and the unrealized P/L of your open positions. 

It represents the current value of your account, which fluctuates as the market moves. If the market moves against your positions, your equity decreases; if it moves in your favor, your equity increases.

In essence, equity shows the “temporary” value of your account, while the balance reflects your actual, settled funds which you can withdraw.

Relationship Among Unrealized and Realized P/L, Balance and Equity

We’ll explain how unrealized and realized P/L, balance,and equity interact and change over time, using practical examples. Usually you will not have to calculate all these yourself, as your broker will do it for you, but it is a useful process to familiarize yourself with.

1. Initial Account Deposit

Let’s start by opening a new account with a deposit of $1,000. At this point, your balance is $1,000. Since you haven’t opened a position yet, there is no unrealized P/L or swap fee, and thus, your equity equals your balance.

2. Opening a Position and Tracking Unrealized P/L

Suppose you open a long position on one standard lot of EUR/USD at a price of 1.10800. If the forex market moves against you and the current exchange rate for EUR/USD drops to 1.10700, here’s how you can calculate your unrealized P/L:

• Lot Size: 1 standard lot = 100,000 units

• Value Per Pip = 100,000 * $0.0001 = $10/pip

• Current Price: 1.10700

• Entry Price: 1.10800

• Lost Pips: -10 pips (1.10800 → 1.10700)

• Unrealized P/L = Lost Pips × Value Per Pip = -10 pips × $10/pip = −$100

You have a floating loss of $100. Your balance remains unchanged at $1,000 since the position is still open and the P/L is unrealized. However, your equity adjusts to reflect the unrealized loss:

• Equity = Balance + Unrealized P/L = $1,000  + (- $100) = $900

3. Closing Position and Realizing P/L

The loss remains unrealized as long as the position is open. You might wait, hoping the price will turn in your favor. Suppose the EUR/USD rises to 1.11000, making your unrealized P/L positive:

• Current Price: 1.11000

• Profited Pips: +20 pips (1.10800 → 1.11000)

• Unrealized P/L = Profited Pips × Value Per Pip = +20 pips × $10/pip = +$200

If you decide to close your EUR/USD position at this new price of 1.10100, you lock in the profit. After closing your position, your unrealized P/L reset to 0 (since there is no open position), and your balance updates with the realized P/L:

• Realized P/L: +$200

• New Balance: $1,000 + $200 = $1,200

Why Unrealized P/L Matters

Unrealized P/L (Profit/Loss) is all about the potential gain or loss on an open position based on current market prices. It shows the difference between the market price of an asset and the price at which you opened the position. As long as the position is open, unrealized P/L gives you a real-time snapshot of your standing in the market and helps you gauge how your account is performing.

Guiding Your Trading Decisions

Keeping an eye on unrealized P/L is crucial for monitoring your trades and managing risk. By tracking your positions in real time, you can see if your strategy is working or if you need to make adjustments. If your unrealized P/L is negative, it might be a sign to exit the position to prevent further losses. Conversely, a positive unrealized P/L could indicate potential gains. This real-time insight lets you make informed decisions about whether to hold, adjust, or close your positions based on your market expectations and risk tolerance.

Maintaining Adequate Margin

Unrealized P/L also plays a key role in managing your account equity and margin. Although your account balance doesn’t change until you close a position, your equity reflects the total value of both realized profits and unrealized gains or losses. Significant unrealized losses can lower your account equity and might even trigger a margin call. If your equity drops below the maintenance margin level, you could be forced to close positions. Keeping track of your unrealized P/L helps you avoid unexpected liquidations and ensures you maintain sufficient margin for your open trades. In a future post, we’ll dive deeper into margin.

In summary, unrealized P/L is crucial for managing your positions effectively. It provides insight into market performance, helps you manage risk, and ensures your account equity stays healthy.

Conclusion

Unrealized P/L gives you a real-time view of potential gains or losses on open positions, impacting your equity and helping guide your trading decisions. Realized P/L, on the other hand, reflects the actual profit or loss once a position is closed and updates your account balance. Understanding both is crucial for managing risk, maintaining adequate margin, and making informed trading choices. Keeping track of these metrics ensures your account stays balanced and responsive to market changes.