Profit & Loss (PnL)

Profit & Loss (PnL) is a measure of the financial performance of a trading position or portfolio over a specific period of time. PnL is calculated as the difference between the purchase price and the selling price of a security or asset, taking into account any associated trading costs such as commissions or fees.

A positive PnL indicates a profit, while a negative PnL indicates a loss. Traders use PnL to monitor the performance of their trading strategies and to make decisions about whether to continue holding a particular position or to exit it. PnL is an essential metric for traders, as it helps them evaluate their risk-reward ratio and manage their exposure to potential losses.

The first step in determining profit and loss for perpetual futures contracts is to understand the basic mechanics of these contracts. Perpetual futures contracts are derivatives that allow traders to speculate on the future price movements of an underlying asset without owning the asset itself. These contracts are perpetual, meaning that they do not have an expiration date, and their prices are based on the underlying asset's spot price. Perpetual futures contracts are settled on a daily basis, and traders can hold long or short positions.

The second step is to calculate the profit or loss on a trade. To do this, traders need to know the entry price, exit price, and size of their position. If a trader goes long on a perpetual futures contract and the price of the underlying asset increases, they will make a profit. On the other hand, if the price of the underlying asset decreases, they will make a loss. The opposite is true for short positions. To calculate the profit or loss, traders can use the following formula:

Profit/Loss = (Exit Price - Entry Price) x Position Size

The third step is to consider the funding rate. Perpetual futures contracts have a funding rate, which is the rate that long and short positions pay or receive to keep their positions open. The funding rate is based on the difference between the perpetual futures contract price and the underlying asset's spot price. If the perpetual futures contract price is higher than the spot price, long positions pay short positions, and vice versa. The funding rate is calculated and paid every eight hours. Traders need to factor in the funding rate when calculating their profit and loss to get an accurate picture of their trading performance.

Unrealized PNL (profit and loss) is the gain / loss you would earn by closing your open position now. It is calculated based on the difference in USD value between your average entry price and the current index price.

Realized PNL is the gain / loss that has already been captured from the position after closing or due to funding payments. It is calculated based on the difference in USD value between your average entry price and exit price. Additionally, all funding payments for the position are immediately applied to its realized PNL.