When is profit profit?

[iain3915]

"There is no profit/loss until you close the position"

Is this true?

 

[counter_violent]

"There is no profit/loss until you close the position"

Is this true?

Yes but I would go further...a profit is not a profit until it has been removed from the trading account...thus taken out of the equation and not subjected to further speculation.

 

[iain3915]

But surely if the present value of your portfolio has increased then you are in profit since you can instantly convert that profit into cash.

 

[counter_violent]

But surely if the present value of your portfolio has increased then you are in profit since you can instantly convert that profit into cash.

Yes I understand that the account will show a profit...the point is that until this on paper profit is realised by way of removal from the account...then you don't actually have anything physically in your hands....cash....and the temptation to try and turn another profit from the increased account always takes over in the minds of the inexperienced and subsequently they give it all back and more besides.

 

[iain3915]

I understand the point you are making. But the fact that the on paper profit can be converted to cash immediately surely means that you are in profit. You may not stay in profit when greed gets the better of you but at that moment you are in profit.

I think what I am saying is that the money in your account is completely liquid. And therefore the fact that it is not in cash is, in my opinion, irrelevant since it can instantly become cash.

 

[luckyd1976]

Yes but I would go further...a profit is not a profit until it has been removed from the trading account...thus taken out of the equation and not subjected to further speculation.

I'ld take it one more step further.

Removed from trading account
And Equated taxes

Before Profits are profits...

 

[shadowninja]

Yes but I would go further...a profit is not a profit until it has been removed from the trading account...thus taken out of the equation and not subjected to further speculation.

There's the assumption that you don't blow your account and re-deposit all your withdrawn money. :innocent:

 

[megamuel]

Profit is what you have just before you pay a visit to your favourite stripper. You exchange said profit for sexual frustration...

 

[bbmac]

But surely if the present value of your portfolio has increased then you are in profit since you can instantly convert that profit into cash.

The difference is between realised and unrealised profit/loss. Until you close a position (s) you have unrealised profit or loss. The profit or loss is only realised when a position (s) is closed, hence an unrealised profit or loss can grown bigger or smaller within the bouinds of your stop/limits or other such intervention like a margin call.

 

[new_trader]

"There is no profit/loss until you close the position"

Is this true?

Whilst this is true for profits it is very dangerous when applied to losses. With this kind of thinking the inexperienced trader is inclined to move a STOP in the hope that a losing position turns into a winning one. Individual trades are important but you cannot allow yourself to lose sight of the bigger picture. You are better off analysing profit and loss at the end of the trading week or month. That is to say, you should endeavour to do your best on each trade and study why each one was a winner or loser but you need to get to a point where you are neither excited nor depressed by either. Your goal is to be proficient. The reward for proficiency is an average net profit per trade.

 

[foredog]

I understand the point you are making. But the fact that the on paper profit can be converted to cash immediately surely means that you are in profit. You may not stay in profit when greed gets the better of you but at that moment you are in profit.

I think what I am saying is that the money in your account is completely liquid. And therefore the fact that it is not in cash is, in my opinion, irrelevant since it can instantly become cash.

Just as you go to close your position a shock announcement comes out and the market goes 200 pts against you...not a profit now is it?

and don't say it'll never happen...it does.

 

[Charlton]

But surely if the present value of your portfolio has increased then you are in profit since you can instantly convert that profit into cash.

Wrong - there is no guarantee at all that you can "instantly" turn that profit into cash.

The instrument might not be very liquid, thus if you were, say, long some shares you might find it difficult to find a buyer at that price.

Prices might move very quickly before you can physically act and your "profit" can be wiped out in seconds.

Prices can gap down and even your stops won't be hit.

There are also further transaction costs upon closing a position that need to be taken into account.

Profit is only really pofit when you have closed your position

Charlton

 

[shadowninja]

You could look at it from a business viewpoint as trading is a business. Your business creates widgets. Each widget costs £1 to make and you sell them for £2. You have 1000 widgets in your warehouse. Does this mean you have £1000 profit?

 

[jaet1989]

A profit is a gain spent, until then it is not safe in the hands of a speculator dealing his own capital.

 

[Citizen2007]

The majority of trades are never closed at the highest gain, there is always some given back before an exit is confirmed.

For this reason only when it is booked, anything in between is either greed or uncertainty.

 

[rathcoole_exile]

it's not a profit until it's converted into a beer belly