Understanding Profit and Loss in Trading
In trading, profit and loss (PnL) measures financial performance. It’s categorized into two types:
- Realized PnL: Gains or losses from completed trades (closed positions).
- Unrealized PnL: Potential gains/losses from open positions based on current market prices.
Key Differences
| Aspect | Realized PnL | Unrealized PnL |
|---|---|---|
| Status | Locked-in (trade closed) | Fluctuates (position still open) |
| Tax Implications | Taxable events | Not taxed until realized |
| Calculation | Final sale price minus purchase cost | Current market price minus entry cost |
Floating PnL vs. Position PnL
Floating profit/loss and position profit/loss both describe unrealized gains/losses, but nuances exist:
Position PnL:
- Snapshot of unrealized gains/losses at a specific time.
- May include dividends (e.g., stocks) or margin adjustments (e.g., futures).
Floating PnL:
- Dynamically changes with market prices.
- Focuses purely on current market value versus entry cost.
👉 Learn how to track PnL effectively
FAQs
1. Is unrealized PnL the same as floating PnL?
Yes. Both terms refer to gains/losses from open positions, but "floating" emphasizes real-time changes.
2. When does unrealized PnL become realized?
When you close the position (sell the asset or settle the contract).
3. Why is realized PnL important for taxes?
It represents actual income/losses, triggering tax obligations in most jurisdictions.
4. Can unrealized PnL turn negative?
Absolutely. If the market moves against your open position, unrealized losses occur.
Calculating PnL
- Stocks:
(Current Price − Purchase Price) × Shares − Fees - Futures:
(Mark Price − Entry Price) × Contract Size × Leverage
Final Notes
- Monitor unrealized PnL to gauge open-position performance.
- Realized PnL reflects actual trading success.
- Use tools like trading journals to track both metrics systematically.
By understanding these concepts, traders optimize strategies and comply with financial reporting requirements.