Understanding Unrealized P/L and Realized P/L
Unrealized P/L
Unrealized P/L (Profit/Loss) refers to the current profit or loss on an open position. This means the potential profit or loss that you would make if you were to close the position right now.
For example, let’s say you bought 1 lot of EUR/USD at 1.2000. If the current market price is 1.2050, your Unrealized P/L would be:
Unrealized P/L = (1.2050 – 1.2000) x 100,000 = $50 Profit
The Unrealized P/L is not yet added to or subtracted from your Account Balance, as the position is still open.
Realized P/L
Realized P/L refers to the actual profit or loss that is recorded in your Account Balance when you close a position.
For example, let’s say you bought 1 lot of EUR/USD at 1.2000 and later sold it at 1.2050. Your Realized P/L would be:
Realized P/L = (1.2050 – 1.2000) x 100,000 = $50 Profit
This $50 profit is now added to your Account Balance, as the position has been closed.
How Unrealized and Realized P/L Affect Account Balance
Opening a Position:
When you open a position, your Account Balance is not affected. The Unrealized P/L is the only thing that changes, reflecting the current market value of your open position.
Closing a Position:
When you close a position, the Unrealized P/L becomes Realized P/L, and this amount is added to or subtracted from your Account Balance.
For example, if you close a position with a Realized P/L of $50 profit, your Account Balance will increase by $50.
Overnight Swap/Rollover:
If you keep a position open overnight, you may be charged or credited a small swap/rollover fee, which will be reflected in your Account Balance.
It’s important to understand the difference between Unrealized P/L and Realized P/L, as this knowledge will help you manage your trading account and risk effectively. Unrealized P/L is the potential profit or loss, while Realized P/L is the actual profit or loss that is added to or subtracted from your Account Balance.
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Example 1: Opening a Long Position
1. Account Balance: $1,000
2. You decide to buy 1 lot of EUR/USD at a price of 1.2000.
3. Your Unrealized P/L is initially $0, as the position has just been opened.
4. Your Account Balance remains at $1,000, as no Realized P/L has been recorded yet.
Example 2: Closing a Profitable Position
1. Account Balance: $1,000
2. You previously bought 1 lot of EUR/USD at 1.2000.
3. The price of EUR/USD has now increased to 1.2050.
4. You decide to close the position at 1.2050.
– Realized P/L = (1.2050 – 1.2000) x 100,000 = $50 Profit
5. Your Account Balance now increases to $1,050, as the $50 profit is added to your account.
Example 3: Closing a Losing Position
1. Account Balance: $1,000
2. You previously bought 1 lot of EUR/USD at 1.2000.
3. The price of EUR/USD has now decreased to 1.1950.
4. You decide to close the position at 1.1950.
– Realized P/L = (1.1950 – 1.2000) x 100,000 = -$50 Loss
5. Your Account Balance now decreases to $950, as the $50 loss is subtracted from your account.
Example 4: Overnight Swap/Rollover
1. Account Balance: $1,000
2. You have an open long position on EUR/USD.
3. At the end of the trading day, your broker performs a rollover, and you are charged a swap fee of $0.50.
4. Your Account Balance now decreases to $999.50, as the $0.50 swap fee is subtracted from your account.
In these examples, you can see how the Unrealized P/L is reflected in the current market value of your open position, while the Realized P/L is added to or subtracted from your Account Balance when you close a position. Additionally, any overnight swap/rollover fees can also affect your Account Balance.