Realized And Unrealized Returns - It's Best Not To Generate Goof Ups On Your Own Account!
Traders deal with 2 various kinds of returns when they speak of profits and losses made in the markets. Realized returns, typically referred to as "booked", are those that can come about as the result of a position that is closed out.
Unrealized, or "paper", gains and losses are those that involve open positions. A good example of a paper return would be when one buys a stock at $100 and it rises to $110, but the trade remains open. In this case the trader has an unrealized return of $10. Were the trade to become closed out at that value, that $10 gain would grow to be a realized, or booked, profit.
Though it might seem a fairly trivial point, the concept of paper verses booked returns is an important one in the realm of trading and money management.
Debates are frequently had as to whether or not paper losses are real, or whether or not they only become real when actualized. This really is a key distinction that may play a significant role in one trade, depending on the market in question.
Where one is trading primarily in cash terms in a market like stocks, the difference between paper and booked returns isn't really important. Regardless of how much the market moves in either favor or against a trader's open position, it does not impact her/his ability to enter further trades.
When one trades a market such as futures and spot foreign exchange, however, there actually is no such thing as paper returns simply because these markets are dependent on margin. As a result, all profits and losses are realized for the reason that they directly effect one's available margin.
Understanding the impact of realized and unrealized returns is something key in the development of both money management schemes and trading strategies. Require additional help?
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Failure to identify how these differences play-out in one's account can result in major errors within the assumptions underlying position sizing, as well as exposure. It can mean the difference between a worthwhile system and a useless one, or between a safe risk profile and a reckless one.
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