You’ve learned about account balances in the previous lesson. Many factors can affect your account balance. One of these components is unrealized or floating profits and losses, or P/L.
In this lesson, you’ll learn more about unrealized P/L and how they can impact your account balance.
Lesson Highlights
- There are two types of profits and losses in trading: realized and unrealized (or “floating”).
- Unrealized P/L are profits or losses that are not yet reflected in your account balance.
- Floating P/L only becomes realized and reflected in your account balance when you close your positions.
Unrealized or Floating P/L
Unrealized profits/losses, often called floating P/L, are profits or losses from your currently open trades or positions. You can think of floating P/L as your potential profits or losses; these profits are not yet reflected in your account balance.
Your unrealized P/L are from your open positions and are subject to constant market price fluctuations. This is the reason why unrealized P/L is also called floating P/L.
Because unrealized P/L moves (or “floats”) with the market, it can become an unrealized loss if the market moves against your open positions.
Calculating Unrealized P/L
To determine your unrealized P/L, you have to use the following formula:
Floating P/L = (Current Price – Entry Price) * Position Size
Suppose you have a long position for 1 standard lot of euros in your USD account, which you purchased at an exchange rate of EUR/USD 1.1005.
Now, let’s compute your unrealized P/L if the EUR/USD market price becomes 1.1050.
Floating P/L = (1.1050 – 1.1005) * 100,000
Floating P/L = 0.0045 * 100,000
Floating P/L = 450
In the above scenario, the exchange rate went up 45 pips from your entry price. Since USD is the quote currency in the EUR/USD pair, the pip value for a standard lot will be pegged at USD 10.
This means that you have an unrealized profit of USD 450.
Let’s assume the market moved against you instead, and the price went from 1.1005 to 1.0991.
Using the same formula:
Floating P/L = (1.0991 – 1.1005) * 100,000
Floating P/L = 0.0014 * 100,000
Floating P/L = –140
In this case, you will have an unrealized loss of USD 140.
Realized P/L
Contrary to unrealized P/L, realized P/L are profits or losses from trades you have closed or completed.
This means the USD 450 unrealized profit from the earlier example will be realized and reflected in your account balance. The same is true for the USD 140 worth of floating loss.
Unrealized P/L will only become realized the moment you close your trades. As long as your trades remain open, your floating profits can still turn into losses and vice versa.
Suppose you have a USD 3,000 account balance and USD 500 in unrealized profit. If you close your open positions at this time, your account balance will increase to USD 3,500.
Conversely, closing your open positions while you have an unrealized loss of USD 500 will reduce your account balance to USD 2,500.
No Profit 'Til You Close It
When trading, it’s important to remember that your profits are always only hypothetical until and unless you close your positions.
No matter how large your current profits are, they can vanish instantly if your position remains open. Always close your trades once you’ve reached your target profits to avoid losing potential earnings.
When you do, your unrealized P/L becomes realized and reflected in your account balance.
Trading Strategies to Manage Unrealized P/L
There are many trading strategies you can use to manage your account’s floating profit/loss effectively.
Some of the most common techniques you can use include:
- Setting stop-loss orders
- Setting take-profit orders
- Diversifying
- Scaling in or out
In the next lesson, you’ll learn about margins, yet another forex trading concept involving the amount of money you have in your account.
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