What it means
Realized PnL is the profit or loss from positions that have been closed — fully captured, transferred to account balance, can be withdrawn. Unrealized PnL is the running profit or loss on open positions, marked-to-market continuously, but not actually captured until the position is closed. Critical distinction: 'I'm up $50,000' often means unrealized — meaning, that profit can disappear instantly with a price move. Realized PnL is the only meaningful measure of strategy performance.
Why it matters
Traders consistently overestimate strategy performance by reporting unrealized P&L during winning streaks. A 100% unrealized gain that ends with a position closed at break-even = 0% realized. Strategy evaluation must be based on REALIZED P&L over completed trade samples, not screenshots of peak unrealized positions.
How to use it
Track realized P&L weekly and monthly as the system performance measure. Use unrealized P&L only for real-time position management (assessing whether to add, trim, or exit). When evaluating strategy edge, only count realized — unrealized is psychology, not performance.
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