Positions and profit and loss (PnL) management

Orders that get executed cause market participants to have positions in the instrument that they got executed, for the amount the order executed, and at the price of the execution (limit orders can match at better prices than they were entered for, but not worse). A buy side execution is called having a long position, while a sell side execution is called having a short position. When we have no position at all, this is referred to as being flat. Long positions make money when market prices are higher than the price of the position, and lose money when market prices are lower than the price of the position. Short positions, conversely, make money when market prices go down from the price of the position and lose money when market prices go up from the price of the position, hence, the well-known ideas of buy low, sell high, and buy high, sell higher, and so on.

Multiple buy executions, or multiple sell executions for different amounts and prices, cause the overall position price to be the volume weighted average of the execution prices and quantities. This is called the Volume Weighted Average Price (VWAP) of the position. Open positions are marked to market to get a sense of what the unrealized Profit and Loss (PnL) of the position is. This means that current market prices are compared to the price of the position; a long position where market prices have gone up is considered unrealized profit, and the opposite is considered unrealized loss. Similar terms apply to short positions. Profit or loss is realized when an open position is closed, meaning you sell to close a long position and you buy to close a short position. At that point, the PnL is given the term realized PnL. The total PnL at any point is the total of the realized PnLs so far and the unrealized PnLs for open positions at the market price.

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