Recently, a few people asked me—what exactly is PnL, and why is everyone talking about it? It turns out that many traders don’t have a clear idea of what they’re actually calculating when they look at their results. And that’s crucial if you want to know whether you’re making money or losing it.

PnL simply refers to the change in the value of your position over a specific period. Sounds straightforward, but the devil is in the details. You need to distinguish between the price at which your contract is marked to market (MTM) and the price at which you actually closed it. These are two completely different worlds.

Let’s start with the basics. MTM means valuation at the current market price. Imagine you hold ETH. Yesterday, it was worth $1950; today, it’s $1970. The difference? Plus $20. That’s your PnL—the difference between the previous and current value. But if today it drops to $1980, you’d have a loss of $30. Simple, right?

But wait, it gets more interesting. There are two types of PnL you need to know about. Realized PnL is the profit or loss you actually realize when you close a position. Did you sell your DOT, which you bought for $70, for $105? You made a $35 profit. That’s it. But if you sell for $55, you incur a $15 loss.

On the other hand, you have unrealized PnL—that’s the profit or loss you theoretically have but haven’t closed yet. You bought ETH at $1900, and now the price has dropped to $1600. On paper, you’re down $300, but until you sell, it’s just numbers on the screen. This can change.

Now, how do you calculate all this? There are different methods depending on how you want to do it. FIFO—First In, First Out—means you sell the oldest position first. Bob bought ETH at $1100, then at $800. A year later, he sells at $1200. Using FIFO, his initial cost is $1100, so his profit is $100. But if he used LIFO—Last In, First Out—his last purchase was at $800, and his profit would be $400. A big difference.

Or you can use the weighted average cost method. Alice bought BTC at $1500, then at $2000. The average cost is $1750. She sold at $2400, making a $650 profit. This is a fairer way if you buy regularly at different prices.

You can also track from the beginning of the year—YTD. If you’ve held ADA since January 2022 at $1000, and in January 2023 it’s worth $1600, you have an unrealized profit of $600. Useful for long-term performance tracking.

Or simply count each transaction. Bought 1 ETH at $1000, sold at $1500? Your PnL is a $500 profit. A straightforward calculation.

Interestingly, you can also look at percentage profit. A trader buys BNB at $300 and sells at $390. That’s a $90 profit, but in percentage terms, it’s 30%. You divide the profit by the purchase price and multiply by 100. Sometimes, this approach shows a clearer picture than raw numbers.

If you’re trading perpetual contracts—those without an expiration date—you need to calculate both realized and unrealized PnL and then add them together. It’s more complex because you also need to account for collateral deposits and funding fees.

In practice, remember that these calculations are simplifications. In reality, taxes, transaction fees, and volatility come into play. But if you understand PnL at this level, you’ll already have a better picture of what’s happening in your portfolio.

Many platforms have tools that do this for you—spreadsheets, trading bots. But if you really want to know what you’re doing, it’s worth learning how to do it yourself. That way, every decision will be more informed.