Unrealized Gain/Loss Definition. An Unrealized Gain/Loss is the hypothetical gain or loss on a single Open Position, or on all Open Positions, valued at current market rates, as determined by the forex trader or by his broker to assess his outstanding risk. The figure is computed by taking the current market value for a position and deducting its book value, i.e., the amount expended originally to purchase the open position. Unrealized Gains or Losses become Profits or Losses for tax reporting purposes whenever a position is liquidated or closed. For example, if a forex trader goes long on Euros and the market appreciates in his favor, he is said to have a “paper” gain in his position. In accounting terms a paper loss or gain is called so because the loss or gain is only real on paper so far, the actual transaction has not yet been completed, and therefore it is not yet accountable as a profit or loss. Paper gains are not taxable, nor recordable, and until realized, they are not permanent. The foreign exchange market tends to be very volatile, and unrealized gains can vanish in an instant. For this reason, long-term investments in foreign exchange are not advisable due to the unpredictability of basic fundamentals that influence the market. Due to the possibility of sudden fluctuations in market values, a wise forex trader that has a winning position that is running on a favorable upward trend will typically employ a trailing stop strategy to lock in a majority of his unrealized trading gains until a timely exit.
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