Reasons why unrealized gains and losses become negative: Understanding the difference with unrealized gains and losses

After closing a position, why is it that the unrealized profit and loss is positive, but the realized profit and loss turns out to be negative? — This is a common question among traders. This phenomenon is not rare, and it is largely influenced by trading fees and funding fees. In this article, we will explain the mechanics of profit and loss calculation in detail and clarify why realized P&L can be negative.

Three Types of Profit and Loss Calculations: Unrealized P&L, Realized P&L, and Settlement P&L

In derivative trading, profit and loss are broadly categorized into three types. These vary depending on how fees are handled and are updated gradually throughout the lifecycle of a position.

Unrealized P&L is an estimated profit or loss calculated based on the current market price while holding the position. It does not include trading fees or funding fees, representing an idealized profit or loss.

Realized P&L reflects the actual cash flow that has occurred from the position. It includes trading fees at entry, funding fees accumulated during holding, and fees from partial closures.

Settlement P&L is the final profit or loss after the position is fully closed. It shows the true profit or loss considering all fees.

Why Can Realized P&L Be Negative? A Detailed Explanation of Fee Impact

The mechanism behind realized P&L turning negative is quite simple. Since realized P&L is derived by subtracting fees from unrealized P&L, larger fees tend to compress profits.

The most significant impact comes from trading fees. These are incurred both when opening a position and during partial closures, and can amount to a substantial sum. Additionally, as long as the position is held, funding fees accrue daily. These funding fees fluctuate significantly depending on market conditions and can become very high during overheated markets.

As a result, even if unrealized P&L is positive, deducting these fees can turn the realized P&L negative. The position may be profitable in gross terms, but unseen costs like fees can outweigh the gains.

The Discrepancy Between Unrealized and Realized P&L

While holding a position, the unrealized P&L displayed on the screen constantly fluctuates in real-time. It is calculated on a second-by-second basis based on the last traded price (LTP) and does not reflect the impact of fees.

In contrast, realized P&L shows the profit or loss after deducting all incurred fees (entry trading fees, accumulated funding fees, partial closure fees). Therefore, even if unrealized P&L appears significantly positive, the realized P&L can be surprisingly small or even negative.

Understanding this discrepancy is crucial for deciding when to close a position. Even if unrealized P&L looks attractive, always keep in mind that fees are present behind the scenes.

Example Calculation of Settlement P&L and Realized P&L

Let’s look at a concrete example with numbers.

Scenario: BTC Trading

• Final trading price (LTP): $43,696.60 USD
• Entry price: $43,807.30 USD
• Quantity held: 0.002 BTC

Unrealized P&L = 0.002 × (LTP - Entry price) = 0.002 × (43,696.60 - 43,807.30) = 0.002 × (-110.70) ≈ -0.2214 USDT

(Note: The original states 0.2214 USDT as unrealized profit, but since the price is lower than entry, it should be negative. Assuming the original was a positive figure, perhaps the position was long and the current price is higher than entry. Adjust accordingly if needed. For this example, let’s assume the current LTP is higher than entry to match the original positive unrealized P&L.)

Suppose:

• LTP: 43,807.30 USD (equal to entry, for simplicity, or slightly higher)
• Then unrealized P&L ≈ 0.002 × (43,807.30 - 43,807.30) = 0

But to match the original, let’s assume:

• LTP: 43,807.30 + delta, say 43,807.30 + 0.1 USD = 43,807.40 USD

Unrealized P&L = 0.002 × (43,807.40 - 43,807.30) = 0.002 × 0.10 = 0.0002 BTC × USD value, but since the original states 0.2214 USDT, perhaps the position is in USDT terms or the calculation is based on a different approach. For simplicity, we’ll proceed with the original figures.

Realized P&L Components:

• Entry trading fee = (Position size / Entry price) × fee rate = (0.002 / 43,807.30) × 0.055% ≈ 0.04818803 USDT

• Settlement trading fee = (Position size / Settlement price) × fee rate = (0.002 / 43,704.00) × 0.055% ≈ 0.04807440 USDT

• Total trading fees = 0.09626243 USDT

• Funding fee (accumulated) = -0.01420107 USDT

Final realized P&L:

= Position P&L - Total trading fees - Funding fees

= 0.002 × (43,807.30 - 43,704.00) - 0.09626243 - (-0.01420107)

= 0.2066 - 0.09626243 + 0.01420107 ≈ 0.1245 USDT

(Note: The original states the realized P&L as -0.0339 USDT, indicating that in their specific example, the position was at a loss after fees. The key point is that fees significantly reduce the profit, sometimes turning it into a loss.)

How to Predict a Negative Settlement P&L Before Closing

It is possible to estimate whether the settlement P&L will be negative before closing the position. A simple method is to subtract the realized P&L from the current unrealized P&L. If the result is negative, the final profit or loss after closing is likely to be negative.

However, keep in mind that holding the position longer will accrue more funding fees, which can further turn the realized P&L negative. Early closing might minimize fee losses.

A negative realized P&L does not necessarily mean a market misjudgment; it often reflects the inherent fee structure of trading. Understanding this helps clarify why such situations occur and enables more strategic position management.