Trader’s Dictionary — ELI5, Part 4

leverj (25)in #trading • 7 years ago (edited)

Profits and Losses

A successful trader has one objective, when all is said and done: to maximize portfolio value. This means being able to use margin carefully and watching P&L.

Make Profits, Take Profits, Keep Profits

This is easier said than done, but if you’re just starting out, we’ve got a few more important terms to help you out. This edition of Trader’s Dictionary is all about profits, losses, and the different ways you can use your capital in a trade. Let’s learn about PNL, Realized PNL, Unrealized PNL, Fixed Margin, and Cross Margin.

Disclaimer:

This information is meant for educational purposes only, and should not be taken as investment advice.

PNL

P&L, colloquially known as PNL to traders, is simply Profit & Loss. Profit and loss are the two options when it comes to the financial return (or lack-thereof) of a trade. If you’ve made more gains than losses, your PNL will be in the green. You will be in profit. Lose more than you’ve gained, and you’re looking into the red. You’re at a loss.

Realized PNL

Realized PNL is the state of your PNL after reducing or closing a position. If the position was profitable, once closed the profits will be added to you account balance. If the position went against you, was stopped out at a loss, or was liquidated, the amount lost will be deducted from your account balance.

Unrealized PNL

Unrealized PNL is the state of your PNL while in an open position. Unrealized PNL can change rapidly and at a moment’s notice during times of high volatility. In order to withdraw the profits reflected in your unrealized PNL, you would need to “realise” those profits by closing your position. Similarly, your account balance will not shrink from a negative unrealized PNL unless that position is closed at a loss (or liquidated.)

Fixed Margin

Fixed Margin, also known as Isolated Margin, is when you lock a certain amount of margin behind a position such that you can not lose more than that amount if the market moves against you. Instead, if the trade moves against you and your Unrealized PNL falls below this maintenance margin, the position is liquidated. For example, if you have a balance of 10 ETH on your account and decide to use 1 ETH in a ETH/USD long position, then no matter how low ETH/USD drops, you will not lose more than 1 ETH.

Using Fixed Margin, you are free to add or remove margin on your position to either keep it afloat if it moves against you, or to free up funds for another position if your trade is in profit. This is more beginner-friendly as it allows the trader to minimize downside risk.

Cross Margin

Cross Margin, alternatively, takes the full amount in your account’s available balance to back an open position. Cross Margin allows your position to automatically add or remove margin as needed directly from the available funds in your account balance. As the market moves against you, your available funds consume more margin to avoid liquidation. However, if the market turns far enough against you, your entire account balance is exposed to the possibility of liquidation. This means that if your position is liquidated while using Cross Margin, you will lose your entire account balance. Because of this, it is more suitable for experienced traders who know how to balance their risk appropriately.