In the previous lesson, the concept of balance was discussed. And in this lesson, two more terms shall be opened up, namely, unrealized P/L and realized P/L. First up, P/L is an abbreviation for Profit/Loss. Many assume that there is only one type of P/L, but this is not true. Not just in forex, in other markets as well, there exists both unrealized and realized P/L. Now, let’s begin with understanding each term with the help of examples.
Unrealized P/L, as the name clearly suggests, is the profit or loss running in a trade that is not closed. The profit/loss in unrealized P/L constantly changes as the prices keep changing. Hence, this type of P/L is also referred to as Floating P/L.
The Unrealized P/L is calculated as follows:
❖ Unrealized P/L = Position size x (CMP – Entry price) [Long]
❖ Unrealized P/L = Position size x (Entry price – CMP) [Short]
(CMP – Currency Market Price)
This above formula gives the value in terms of pips. The value in terms of currency can be calculated by multiplying it with the pip value of the currency pair.
Example – Unrealized P/L or Floating P/L
Let’s assume a trader bought 10,000 units of EURUSD at 1.4100. After a while, the price rises to 1.5000. If the trade is still running, the floating P/L can be determined, as shown.
Since this is a long trade, the following formula is applied.
Unrealized P/L = Position size x (CMP – Entry price)
= 10,000 x (1.6100 – 1.5000)
= 10,000 x (0.11)
Unrealized P/L = 1,100 pips
Hence, the trade is currently running at a profit of 1,100 pips.
Now, if the pip value for a mini lot for EURUSD is $1, the profit sums up to $1,100 (1,100 x $1).
Now, bringing the concept of balance into the picture, the balance for unrealized P/L will not get affected though the trade is in profit or loss. However, once the trade is closed, the balance does get updated.
Realized P/L is the profit or loss in a trade when it closed. Realized P/L is more significant than the unrealized P/L because this is the one that brings a change to the account balance.
The realized P/L can be calculated using the below formula:
❖ Realized P/L = Position size x (Closing price – Entry price) [Long]
❖ Realized P/L = Position size x (Entry price – Closing price) [Short]
Example – Realized P/L
Let’s say a trader went long on EURUSD with 10,000 units at 1.1000. The price drops down to 1.0000. Since the current market price is lower than the entry price, it can be ascertained that the trade is running in a loss, i.e., the unrealized P/L would be negative. Later, the price jumps up to 1.2000. At this point, the trader closes the trade. Since the trade is now closed, the realized P/L can be calculated as follows.
Realized P/L = Position size x (Closing price – Entry price)
= 10,000 x (1.2000 – 1.1000)
Realized P/L = 1,000 pips
In terms of currency value, the realized P/L will be $1,000 (1,000 pips x $1). And this time, the balance will be updated as well.
Hence, this begins us to the end of this lesson. In the next lesson, another important margin terminology shall be discussed. Before you go, make sure to take the below quiz to know if you have got the concepts right.