PNL Calculations Explained

Difference Between Unrealized and Realized PNL

In Futures trading, understanding the distinction between unrealized PNL (Profit and Loss) and realized PNL is crucial for traders to accurately assess their trading performance. Many traders find it confusing when the profit displayed during an open position differs from the actual profit after closing the position. This section breaks down the fundamental differences and provides clear explanations with practical examples.

Basic Definition

The key difference between unrealized and realized PNL lies in whether the position has been closed. This distinction is fundamental to understanding how profits and losses are calculated in Futures trading.

Unrealized PNL: This refers to the profit or loss of an open position, which fluctuates in real time with market price changes. On certain trading platforms, unrealized PNL is calculated by default using the fair price mechanism. Traders can typically choose the pricing basis for unrealized PNL within their current position settings, allowing for flexibility in how they monitor their open positions.

Unrealized PNL represents potential gains or losses that exist only on paper. Since the position remains open, these profits or losses can change rapidly as market conditions evolve. This dynamic nature makes unrealized PNL a useful indicator for monitoring ongoing trades but not a definitive measure of actual trading results.

Realized PNL: The actual profit or loss generated after a position is closed. This represents the final outcome of a trade and includes all components that affect the net result. Realized PNL encompasses trading fees, funding fees, and the closing PNL itself. The closing PNL is calculated based on the market price matched by the system at the time of closing, which may differ from the fair price used for unrealized PNL calculations.

Realized PNL is the true measure of trading performance because it reflects the actual cash flow from the trade. Once a position is closed, the PNL becomes fixed and is added to or subtracted from the trader's account balance.

Important Note: The fair price is calculated based on a combination of the index price and market price, designed to prevent manipulation and provide a more stable reference point. However, it may differ from the last traded price of the contract. This discrepancy is one of the primary factors that can cause differences between unrealized PNL and realized PNL, especially during periods of high market volatility or low liquidity.

Calculation Formula Comparison

Understanding the mathematical formulas behind PNL calculations helps traders predict potential outcomes and make informed decisions. The following table presents the standard formulas used for calculating both unrealized and realized PNL for long and short positions:

For long positions, profit is generated when prices rise, so the calculation subtracts the entry price from the current or closing price. For short positions, profit occurs when prices fall, so the formula reverses this relationship by subtracting the current or closing price from the entry price.

Practical Example

Why does the profit decrease after closing a position? Let's examine a detailed example using USDT-M ETHUSDT Futures to illustrate how unrealized and realized PNL differ in practice.

Position Information:

• Trading Pair: ETHUSDT (Long position: bullish on ETH)
• Avg Entry Price: 2721.18 USDT
• Fair Price: 2723.92 USDT
• Avg Close Price: 2722.91 USDT
• Position Size: 50 contracts (1 contract = 0.01 ETH)
• Opening Fee: −0.2722 USDT
• Closing Fee: −0.2722 USDT

While Holding the Position:

When the position remains open, the unrealized PNL is calculated using the fair price mechanism:

Unrealized PNL = (Fair Price − Avg Entry Price) × Position × Size = (2723.92 − 2721.18) × 50 × 0.01 = 1.37 USDT

Current Unrealized Profit = 1.37 USDT

At this point, the trader sees a potential profit of 1.37 USDT on their trading interface. However, this is not the final profit they will receive.

After Closing the Position:

Once the position is closed, the realized PNL calculation includes the actual matched market price and all associated fees:

Realized PNL = (Avg Close Price − Avg Entry Price) × Position × Size − Trading Fees − Funding Fees = (2722.91 − 2721.18) × 50 × 0.01 − (0.2722 + 0.2722) − 0 = 0.3206 USDT

Actual Profit = 0.3206 USDT

As demonstrated, the actual realized profit (0.3206 USDT) is significantly lower than the unrealized profit shown while holding the position (1.37 USDT). This difference illustrates why traders should not rely solely on unrealized PNL when making trading decisions.

Why is PNL Different Before and After Closing a Position?

Several factors contribute to the discrepancy between unrealized and realized PNL. Understanding these reasons helps traders set realistic expectations and make better-informed trading decisions.

Reason 1: Fair Price Deviation from Market Price

When the fair price deviates from the market price, it causes unrealized and realized PNL to differ. Unrealized PNL is calculated based on the fair price by default, while realized PNL is based on the actual matched market price at the time of order execution.

During periods of high volatility or when market liquidity is thin, the fair price (which is designed to be more stable) may diverge significantly from the actual market price where orders are matched. Large market fluctuations can amplify these differences, resulting in substantial discrepancies between unrealized and realized PNL.

For example, if the fair price shows 2723.92 USDT but the actual market price at closing is 2722.91 USDT, this 1.01 USDT difference per unit directly impacts the final PNL calculation.

Reason 2: Deduction of Trading Fees and Funding Fees

Closing a position involves mandatory fee deductions that reduce the net profit. Trading fees are charged both when opening and closing positions, and these costs must be subtracted from the gross PNL to calculate the actual realized profit.

Furthermore, if the position is held across funding fee periods (typically every 8 hours in perpetual Futures contracts), funding costs may also apply. The funding fee mechanism is designed to keep the contract price anchored to the spot price.

Important Note: If the funding rate is positive, long position holders pay funding fees to short position holders; if negative, short position holders pay longs. These periodic payments can accumulate significantly for positions held over extended periods, further affecting the realized PNL.

In the example above, trading fees totaling 0.5444 USDT (0.2722 × 2) were deducted from the gross profit, substantially reducing the final realized PNL.

Reason 3: Real-Time Price Fluctuations

Cryptocurrency prices are highly sensitive to user trading behaviors and market sentiment. Large buy or sell orders can cause sharp, short-term market price swings, especially in markets with lower liquidity or during periods of high volatility.

These rapid price movements may cause the PNL shown while holding the position to differ from the actual PNL after closing. Between the moment a trader decides to close a position and when the order is actually matched and executed, the market price may have moved, resulting in a different closing price than anticipated.

This phenomenon is particularly pronounced during market events, news announcements, or when large institutional orders enter the market. Slippage—the difference between expected and actual execution prices—can significantly impact the final realized PNL, especially for larger position sizes.

Important Reminder:

• The fair price mechanism is designed to reduce the impact of market manipulation and provide a more stable reference for liquidation calculations, but the actual realized PNL always depends on the market price when the order is matched and executed.
• In Futures trading, unrealized losses may trigger liquidation if they exceed certain thresholds, so controlling position risk through proper position sizing and leverage management is crucial for long-term trading success.
• Traders should always account for fees, potential slippage, and price volatility when calculating expected profits and setting profit targets.

How to Calculate the PNL Rate

The PNL rate, also known as Return on Investment (ROI) in Futures trading, is a critical metric that measures trading performance relative to the capital deployed. Unlike absolute PNL figures, the PNL rate provides a percentage-based measure that allows traders to compare the efficiency of different trades regardless of position size.

Calculation Formula

In Futures trading, the PNL rate is calculated using the following formulas:

PNL Rate = (PNL / Initial Margin) × 100%

Where:

Initial Margin = (Avg Entry Price × Contracts × Size) / Leverage

And:

ROI = Unrealized PNL / Initial Margin

The ROI calculation depends only on the current leverage setting, not on subsequent margin increases or decreases through additional deposits or withdrawals. This makes it a consistent measure of trading efficiency based on the initial capital commitment.

The PNL rate is particularly useful because it accounts for the leverage used in the trade. A 10 USDT profit on a 100 USDT margin (10% return) represents much better trading performance than the same 10 USDT profit on a 1000 USDT margin (1% return), even though the absolute profit is identical.

Detailed Example

Let's walk through a comprehensive example to demonstrate how to calculate the PNL rate in a real trading scenario:

Position Information:

• Trading Pair: ETHUSDT (Long position – bullish on ETH)
• Leverage: 500x
• Direction: Long
• Entry Price: 2697.30 USDT
• Real-time Fair Price: 2703.67 USDT
• Position Size: 50 contracts (1 contract = 0.01 ETH)
• Trading Fee: 0.2697 USDT
• Funding Fee: 0 USDT

Step 1: Calculate Initial Margin

Initial Margin = (Avg Entry Price × Contracts × Size) / Leverage = (2697.30 × 50 × 0.01) / 500 = 2.6973 USDT

This means the trader only needs to commit 2.6973 USDT as collateral to control a position worth 1348.65 USDT (2697.30 × 50 × 0.01), thanks to the 500x leverage.

Step 2: Calculate Net PNL

First, calculate the unrealized PNL based on the fair price:

Unrealized PNL = (Fair Price − Entry Price) × Position × Size = (2703.67 − 2697.30) × 50 × 0.01 = 3.185 USDT

Then subtract all fees to get the net PNL:

Net PNL = Unrealized PNL − Trading Fees − Funding Fees = 3.185 − 0.2697 − 0 = 2.9153 USDT

Step 3: Calculate PNL Rate

PNL Rate = (Net PNL / Initial Margin) × 100% = (2.9153 / 2.6973) × 100% = 108.08%

This impressive 108% return demonstrates the power of leverage in Futures trading. With only 2.6973 USDT of initial margin, the trader achieved a profit of 2.9153 USDT, effectively doubling their initial investment with a relatively small price movement of just 6.37 USDT (0.24% price increase).

Key Insights:

• High leverage amplifies both profits and losses. While this example shows a 108% gain, a similar price movement in the opposite direction would result in a 108% loss, potentially leading to liquidation.
• The PNL rate provides a standardized measure of performance that accounts for the leverage used, making it easier to compare trades with different position sizes and leverage levels.
• When calculating expected returns, always factor in trading fees and potential funding fees, as these can significantly impact the net PNL rate, especially for short-term trades or positions held across multiple funding periods.
• Understanding PNL rate calculations helps traders set realistic profit targets and stop-loss levels based on their risk tolerance and initial margin commitment.

FAQ

What does PNL mean? What is the difference between realized PNL and unrealized PNL?

PNL stands for Profit and Loss, measuring investment gains or losses. Realized PNL is actual profit or loss from closed positions, while unrealized PNL is floating gains or losses from open positions based on current market prices.

How to calculate PNL for stock/futures trading? What is the formula?

PNL formula: (Exit Price - Entry Price) × Quantity - Trading Fees. Realized PNL is profit/loss from closed positions. Unrealized PNL is from open positions based on current market price.

How are fees, slippage, and taxes handled in PNL calculations?

Deduct fees, slippage, and taxes from gross profits to calculate net PNL. These costs directly reduce your actual gains or increase losses. Include all transaction amounts and trading costs for accurate PNL reflection.

How to calculate PNL in options trading?

Options PNL equals the closing price minus opening price, multiplied by contract quantity, minus trading fees. For long positions, profit occurs when closing price exceeds opening price; for short positions, the reverse applies.

How to view and understand PNL data on trading platforms?

Click 'Overview' to view total profit and loss. Select specific trading types for detailed information. PNL data reflects your trading gains and losses across different positions and time periods.

What does negative PNL mean? How to minimize losses?

Negative PNL indicates losses on your investment. Minimize losses by setting stop-loss orders, implementing proper risk management, and reducing position sizes during downturns.