Unrealized Profit and Loss: Concepts Forex Traders Must Understand

2025-01-01
Terms, Learn Forex, Newbie

Understanding the difference between unrealized and realized profits and losses helps to manage funds and control risks more effectively, achieving stable returns in the Forex market.

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

Unrealized P/L and Floating P/L in foreign exchange trading refer to the potential gains and losses of currently open trades. These two terms actually refer to the same concept, just with slightly different emphases, both indicating the profit and loss status of your current open positions.

Unrealized P/L:

Unrealized P/L refers to the potential gains and losses generated by your currently open trading positions, which have not yet been settled. If you were to close all open positions immediately, these gains and losses would then become realized. The value of unrealized P/L changes continuously with market price fluctuations, which is why it is also referred to as floating P/L.

Floating P/L:

Floating P/L refers to the changes in the profit and loss values of open trades amid market volatility. When market prices move in your favor, you may see floating profits; conversely, when price trends are unfavorable, floating P/L may turn into floating losses.

For example:
Suppose you hold a long position of 10,000 units of EUR/USD, with an entry price of 1.15000, and the current market price is 1.13000. Your floating loss is calculated as follows:

Floating P/L = Trade Units x (Current Price - Entry Price)
Floating P/L = 10,000 x (1.13000 - 1.15000) = -200 USD

Therefore, your floating loss is 200 USD. However, if the price rebounds to 1.16000, your floating P/L will turn into floating profit.

Example Explanation:

Floating Loss: Suppose you buy a long position in EUR/USD at an entry price of 1.15000, while the current price is 1.13000. At this point, you will see a floating loss because the price has dropped.
Floating Profit: If the market price rebounds and rises to 1.16000, your position will generate a floating profit.

Realized P/L:

Realized P/L refers to the actual gains and losses that enter your account balance after you close a trading position. Once a trade is completed, any floating P/L immediately converts into realized P/L and reflects in your account balance. Only when the trade is closed do the gains and losses truly affect your balance.

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