Unrealized and realized profit and loss

The currencies market, or forex market is the largest financial market in the world. It is bigger than all stock markets in the world combined. Due to the sheer size of the market, and the various practices, it is important to familiarize yourself with trading in the climate that is created in the foreign currency market. If you are going to invest in the forex market, it is important that you understand the difference between realized and unrealized profit and loss, and how they are demonstrated, as well as how they impact your market position. Understanding this as well as the rules set by your online brokerage will help you to maintain the trading strategy you have put into place.

Most online brokers show your mark-to-market calculations showing your margin balance. This is your unrealized P&L based on where you could close your open position in the market at the moment. It stays up to date based on the current data feed, so you always know where you are in the market. If you have an open position, this will fluctuate continuously.

If you are in a long position, the unrealized profit and loss is where you could sell at the moment. If you are in a short position, the unrealized profit or loss is where you could buy at the moment. If you decide to go for it, and go flat, this will leave the unrealized area and go into your margin balanced, becoming a realized profit or loss. Once it is realized, it is cemented in, and can't be changed.

So to recap the basic definition of unrealized versus realized profit and loss is unrealized is what your profit or loss could be if you sold or bought at the moment. The realized is what it is when you do buy or sell. The two versions of profit and loss, as well as the original margin balance you have will determine your winning or losing position in the market. Understanding how the margin balance is calculated using unrealized profit and loss can help you to protect your investment.

Because the forex market is constantly changing, your unrealized profit and loss, as well as your margin balance (which is the addition of the unrealized profit and loss and the original margin balance, as well as the realized profit and loss if you go flat in the market). The reason knowing your unrealized profit or loss is important is that it impacts your margin balance. If you do not maintain a certain margin balance, your online broker has the right to close your position, cementing in a loss. Thus, paying attention to the unrealized P&L keeps your investment where you want it, and does not result in losing money because you did not plan accordingly. As long as you have an open position, your margin balance will fluctuate with your unrealized profit and loss.