While it may seem a fairly trivial point, the concept of paper vs. booked returns is an important one in the realm of trading and money management. Debates are often had as to whether paper losses are real, or whether they only become real when actualized. This is a key distinction which can play a major role in how one trades, depending on the market in question.
Where one is trading primarily in cash terms in a market like stocks, the differentiation between paper and booked returns is not very important. No matter how much the market moves either in favor or against a trader's open position, it does not impact her/his ability to enter further trades. Imagine, for example, a trader has a $10,000 account, and buys 100 shares of XYZ at $50. That leaves $5000 remaining in the account ($10,000 - $50 x 100, not accounting for transaction fees). It matters not at all whether XYZ rises or falls. The trader will still have $5000 available to enter new positions. This only changes when the XYZ shares are sold and the profit or loss booked.
When one trades a market such as futures and spot foreign exchange, however, there really is no such thing as paper returns because these markets are based on margin. As such, all profits and losses are realized because they directly impact one's available margin. Let us again imagine a trader with a $10,000 starting account value, this time in the futures market. If the margin requirement for a 10-year note futures contract is $2500, and the trader buys two contracts, then the account is left with $5000 in available margin. If that 10-year note contract rises by a point, the trader would have a profit of $2000 on the position (1 point on a 10-year futures contract is equivalent to a 1% move in the value of a $100,000 position, or $1000). Unlike in stocks, this $2000 gain is very real in that the trader now has $7000 in available margin to put to use on other trades. Were the 10-year note to instead fall by a point, however, the trader would only have $3000 free to use as margin.
Understanding the impact of realized and unrealized returns is something key in the development of both money management schemes and trading systems. Failure to recognize how these differences play-out in one's account can lead to major errors in the assumptions underlying position sizing, and 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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Editors’ Picks
EUR/USD stays near 1.0850 after US housing data
EUR/USD trades in negative territory at around 1.0850 in the early American session on Tuesday. The US Dollar preserves its strength following the upbeat housing data and makes it difficult for the pair to gain traction. The two-day Fed meeting goes underway on Tuesday.
GBP/USD recovers modestly from two-week lows, trades near 1.2700
GBP/USD staged a modest rebound after touching its lowest level in two weeks below 1.2700 on Tuesday. The cautious market mood helps the US Dollar hold its ground and limits the pair's upside as markets gear up for the Fed and the BoE policy meetings.
Gold stays in daily range near $2,160
Gold fluctuates in a narrow band at around $2,160 for the second consecutive day on Tuesday. Ahead of the Fed's policy announcements, the benchmark 10-year US Treasury bond yield moves sideways near 4.3% and limits's XAU/USD's volatility.
Why is the crypto market crashing?
The two most important contribution to the ongoing bull market is the meteoric rise in Bitcoin due to the ETF approval and the sudden interest spike in Solana ecosystem. But the recent move suggests that the upward momentum is dissipating and a correction looms.
Shocker, Yen weakens after BoJ hike
The Bank of Japan (BoJ) scrapped its negative rate policy, raised the rates from -0.10% to 0%, ditched its YCC policy and ended the purchases of ETF and Japanese real estate investment trusts.
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