Recently, in the chat groups, many beginners have been confused about the concept of profit and loss in crypto trading, especially the question of what PnL means is asked frequently. Actually, understanding the meaning of PnL is really important for trading, so today I want to talk about this topic.

First, let's mention a phenomenon: many people hold crypto assets but are unclear whether they are making a profit or a loss, which shows a lack of understanding of what PnL means. PnL simply refers to your profit or loss, used to measure the change in your position value over a certain period of time. It sounds complicated, but it’s basically the difference between the entry price and the current market price.

To understand the meaning of PnL, you need to clarify a few key concepts. MTM (Mark-to-Market) is the valuation of your assets based on the current market price. For example, if you hold Bitcoin, its value fluctuates with the market price. Suppose today’s MTM price of Ethereum is $1970, and yesterday it was $1950, then your PnL is a $20 profit. Conversely, if yesterday’s price was $1980, then you have a $10 loss.

Another important distinction is between realized profit and loss and unrealized profit and loss. Realized PnL is the profit or loss you actually confirm after closing a position, for example, buying Polkadot at $70 and selling at $105, the $35 profit is realized. But if you haven't sold yet and are just watching the price fluctuate, that’s unrealized PnL. For example, if you bought Ethereum contracts at $1900 and the mark price is now $1600, that’s an unrealized loss of $300.

There are several methods to calculate PnL. The most common is FIFO (First-In, First-Out), which calculates cost based on the earliest purchase price. Suppose Bob bought 1 Ethereum at $1100 first, then another at $800, and finally sold 1 at $1200; using FIFO, the cost basis is $1100, so the profit is $100. If you use LIFO (Last-In, First-Out), you take the latest purchase price of $800, and the profit becomes $400.

Another method is the weighted average cost, suitable for frequent traders. For example, Alice bought 1 Bitcoin at $1500, then another at $2000, totaling $3500 for 2 coins, so the average cost is $1750. If she sells 1 at $2400, her profit is $650.

Besides these methods, you can also look at year-to-date (YTD) performance or calculate per trade. Some traders prefer to look at profit percentages, for example, buying a coin at $300 and selling at $390, profit is $90, which is a 30% gain.

By the way, calculating PnL for perpetual contracts is a bit more complex; it involves adding both realized and unrealized PnL, and also considering trading fees and funding rates.

Honestly, understanding what PnL means and the various calculation methods greatly helps optimize trading strategies. Many trading platforms and tools can automatically do the calculations, but you should have a clear idea yourself. Only then can you better understand the profit or loss of each trade and make more informed decisions for your next move. If your trading volume isn’t large, tracking manually with a spreadsheet is also a good option.