Unrealized Losses - Definition and Trading Example

Definition of Unrealized Losses

Unrealized losses are the losses from trading activities which have not been closed out and cash received.  These are also commonly referred to as a paper loss.   Many traders find it hard to part ways with a paper loss with the hopes of the security ultimately rallying.

Unrealized Losses Trading Example

Recently the market took a major dive as a result of the 2008 credit crisis.  This type of negative action has produced a large number of unrealized losses in the stock market.  For example, a trader that purchased Goldman Sachs in late September is currently under water.  The stock has experienced a drop of over 40%, but odds are 5 years from now, this unrealized loss will end up as a gain.

Unrealized Losses and Emotions

The key to being successful in the stock market is controlling one's emotions.  Many traders find it difficult to sit through an unrealized loss with the expectation that the trade will ultimately work out.  This is because every trader has a maximum pain area, where the paper loss becomes to great.  As a trader begins to let their emotions cloud their trading, he or she will begin to make unrealized losses a reality.  This lack of discipline leads to consistent losses.