First off, P/L is an acronym for “Profit or Loss” on a trade. And in trading, specifically in forex trading accounts, there are two types of P/L: Unrealized P/L and Realized P/L.
In this lesson, we shall discuss both of them with example sets as well for better understanding.
Unrealized P/L is the profit or loss held in an active trade whose position is still open.
Unrealized P/L is also referred to as “Floating P/L” because the profit or loss continuously changes since the positions are still running.
For example: If you had a position which was running positive, which later turned against you, then it will be called as an unrealized loss, but not unrealized profit though you were in the positive before.
Calculation of Floating P/L
Floating P/L = Position Size x (Current Price – Entry Price) [long trade]
Floating P/L = Position Size x (Entry Price – Current Price) [short trade]
Note: This Floating P/L will give a value in terms of pips. The P/L, in terms of value, can be calculated by multiplying it with the pip value.
Example: Unrealized Loss
Let’s say you bought 10,000 units of EUR/USD at 1.1200. Later, the price rises to 1.1300.
Now, if we were to calculate the P/L for this current running position,
Floating P/L = Position Size x (Current Price – Entry Price)
= 10,000 x (1.1300 – 1.12000)
= 10,000 x (- 0.0100)
Floating P/L = -100 pips
So, the trade is running negative by 100 pips.
In a mini lot, the pip value for EUR/USD is $1.
So, in terms of value, the current floating loss will be $100 (100 pip x $1).
Taking back to the concept of the balance, what do you think the balance would now be after this floating loss of $100 if the account size is $1,000? Well, if you’re in an assumption that it would reduce to $900, you are incorrect. Since this trade is still active (not closed), the balance will not be changed yet. So, once the trade is closed, the balance will get updated accordingly.
As the name suggests, realized P/L is the profit or loss once a trade is closed.
This is the time when the account balance will be reflected by any gains or losses. For example, if you closed a trade with profits, then the account balance will increase. And, conversely, if you closed a trade with losses, then the account balance will decrease.
Example: Realized Profit
Let’s say you went short one mini lot on USD/CHF at 0.9760.
Later, the current exchange rate becomes 0.9560.
So, the position’s Floating P/L will be,
Realized P/L = Position Size x (Entry Price – Current Price) [Short trade]
= 10,000 x (0.9760 – 0.9560)
= 10,000 x 0.02
Realized P/L = 200 pips
The position is up 200 pips.
And since the lot size is 10,000, the pip value is $1.
Now, in terms of value, the realized profit will turn out to be $200 (200 pips x $1).
Also, as this trade is closed, the account balance will be changed. That is, in this case, the account balance will increase by $200.
Hence, this completes the lesson on realized P/L and unrealized P/L. And in the upcoming lessons, we shall continue with some more concepts regarding margin trading.
Take the quick quiz below to know if you have understood this lesson completely.