Realized And Unrealized Returns - Do Not Generate Goof Ups On Your Own Account!

Traders deal with 2 different kinds of returns when they refer to profits and losses produced in the markets. Realized returns, normally referred to as "booked", are those that come about as the result of a position which has been 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 acquires a stock at $100 and it goes up to $110, but the trade remains open. In this instance the trader has an unrealized return of $10. Were the trade to become closed out at that price, that $10 gain would become a realized, or booked, profit.

Though it may seem a fairly trivial point, the concept of paper verses booked returns is a very important one inside the realm of trading and money management.

Debates are typically had as to whether or not paper losses are real, or whether they only become real when actualized. This really is a key distinction that may play a major role in one trade, based on the market in question.

Where one is trading mainly in cash terms in a market like stocks, the difference between paper and booked returns isn't very important. Regardless of how much the market moves either in favor or against a trader's open position, it does not impact her/his capacity to enter further trades.

When one trades a market like futures and spot foreign exchange, however, there actually is no such thing as paper returns mainly because these markets are based on margin. As such, all profits and losses are realized mainly because they directly effect one's available margin.

Understanding the influence of realized and unrealized returns is something key inside the development of both money management schemes and trading strategies. Want more help?

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Failure to recognize how these differences play-out in one's account can result in major errors in the assumptions underlying position sizing, and exposure. It can mean the distinction between a successful system and a useless one, or between a safe risk profile and a reckless one.

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