Many beginners often ask me how exactly PnL is calculated in crypto trading. Honestly, if you don’t understand this part, trading is like blind men touching an elephant—you won’t really know whether you’re making a profit or a loss.

Let’s start with the basics. PnL is profit and loss, reflecting how your position value changes over a certain period. But the interesting part is that there are two types of profit and loss: realized and unrealized. Many people confuse these two concepts, which leads to chaotic trading decisions.

Mark-to-market (MTM) valuation is a key concept. Simply put, it’s valuing your assets at current market prices. For example, the value of your held BTC is constantly changing, and this change is reflected through MTM. I’ve noticed many traders don’t understand this, resulting in only a vague idea of their actual holdings.

Realized PnL is only calculated after you actually close a position. For example, if you buy DOT at $70 and sell at $105, that’s a real profit of $35. But if you haven’t sold yet, just watching the numbers on the screen fluctuate, that’s unrealized PnL. These two concepts greatly influence trading psychology; unrealized PnL can cause emotional swings.

Regarding calculation methods, I’ve used several. First-in, first-out (FIFO) is the most straightforward—calculating based on your earliest purchase prices. Last-in, first-out (LIFO) uses the most recent purchase prices. The weighted average cost method is suitable for frequent traders and can more accurately reflect your true cost. For example, if Alice bought two BTC at $1500 and $2000 respectively, and later sold at $2400, using the weighted average cost method, her profit would be $650. I think this method is the most scientific.

Another practical approach is Year-to-Date (YTD) calculation. If you’re a long-term holder wanting to see how much you’ve earned this year, just compare the value of your holdings at the start and end of the year. I’ve seen someone holding $1000 worth of ADA at the beginning of 2022, which grew to $1600 by early 2023—that $600 is unrealized profit.

Calculating PnL for perpetual contracts is a bit more complex, as you need to add both realized and unrealized PnL. The key is to remember to account for trading fees and funding rates, which are hidden costs. When I first started calculating perpetual contract PnL, I lost money because I didn’t consider these factors.

Nowadays, many tools can help you automatically calculate PnL, like spreadsheets or trading bots. But my advice is, at least understand the underlying logic; otherwise, you won’t understand the numbers the tools produce. Deeply understanding cost basis, position size, and the price of each trade determines whether you can accurately evaluate your strategy’s efficiency.

Honestly, being able to accurately calculate your PnL has a huge impact on your next trading decision. Many traders lose money simply because they don’t understand their true profit and loss, which causes them to lose composure. I recommend regularly analyzing your open positions on Gate as a very effective way to monitor your performance.