Reading time: ~ 2 m
Cryptocurrency trading allows market participants to make profits on exchanges. At the same time, there are risks and significant losses during the trading session. To minimize risks, traders use a large number of tools in order to create profitable strategies and at the same time calculate the profitability of transactions. Exchanges also offer their tools for trading, in particular, such a well-known exchange as Binance. PNL is one such tool. It is an important metric to measure profit and loss while trading assets.
Definition of PNL
PNL (Profit and Loss) is a value that shows the difference between profit and loss while trading. Various initial information is used to calculate it. It can be one deal or an open position, a series of executed deals, deals for a certain time period, deals that were opened using the same strategy.
With such calculations, a P&L report is drawn up, and thanks to it, traders can then determine how effective his trading strategy is, and what profit they can expect.
Calculation of profit using such a tool allows you to get a very accurate result in the end. On the Binance exchange, PNL has its own calculation method.
How PNL is calculated on Binance
There are several formulas for calculating this parameter. If the deal was opened in Long: unrealized PNL = (Marking Price – Initial Buy Rate) * Position Size.
If the deal is opened in Short: Unrealized P / L = (Initial Sell Rate – Marking Price) * Position Size.
The tagging price is the value of the asset at the time of the close of the trade (or at the time of the P&L calculation).
If PNL is not implemented, then this means that the current exchange rate is taken as the base basis. That is, it is an indicator for an open position, showing how much a trader will earn or lose if he decides to close the position now. It is based on real-time price and does not include exchange fees.
The gain or loss will remain unrealized until the trader closes the trade. If a long position is opened, then the market price will be considered the price at which it is possible to sell. If you are short, then this is the price you can buy. Therefore, for accurate calculations, you should also take into account the exchange spread.
How P / L is calculated when trading spot
For example, consider a situation where a trader decided to buy 10 Bitcoins at 30,000 and then sell for 40,000. In this case, the unrealized PNL = (40,000 – 30,000) * 10 = $ 100,000. This is a profit that a trader can get if it closes the position. In order to calculate the realized P&L, you need to subtract the commission from the actual transaction value. If the trader has a classic account on Binance (VIP 0), then the exchange will charge a commission of 0.1%. Then the calculation will look like this:
(30 000 * 10 * 0,1%) + (40 000 * 10 * 0,1%) = 300+400 = 700.
Accordingly, realized P / L = $ 100,000 – $ 700 = $ 99,300.
It is also possible to calculate the loss from the transaction. For example, a trader decided to buy Bitcoin at the rate of $ 30,000, and sells at $ 20,000. In such a situation, the unrealized P&L = (20,000 – 30,000) * 10 = – $ 100,000. This is the loss that the trader will receive after closing this transaction …
In this case, the commission will be calculated as follows: (30,000 * 10 * 0.1%) + (20,000 * 10 * 0.1%) = 300 + 200 = 500. Accordingly, the realized P / L = $ 100,000 + $ 500 = $ 100 500. This is the net loss from the trade when you factor in the commission. Profit and loss are calculated in the same way when opening positions in Short.
How PNL is calculated for margin trading
When trading on margin, the realized and unrealized P / L values are multiplied by the leverage. If a trader has $ 1,000 on his account, and he decided to invest $ 100 in such a trade with a leverage of X10, then he buys an asset worth $ 1,000. Instead of the PNL value, substitute P & L * 10 in the formula.
The calculation for a Long position will be as follows: Unrealized P & L * 10 = (Marking Price – Initial Buy Rate) * Position Size.
For example, a trader buys 10 LTC at $ 100 and sells at $ 110. In this case, the unrealized P & L * 10 = (110 – 100) * 10 = $ 100. This is the profit that he will receive when closing the deal.
P / L calculation for futures contracts
Here the PNL is calculated, given that the cost of the marking is a more accurate indicator of the contract price when compared with the market price of the futures. Therefore, it is the cost of marking that is used on the exchange, this allows to ensure the protection of traders from accidental liquidation of the asset.
The unrealized PNL for futures is calculated using the following formulas:
- For a Long position: unrealized P / L = (Futures marking price – Initial futures buying rate) * Position size.
- For a Short position: Unrealized P&L = (Futures Initial Sell Rate – Futures Marking Price) * Position Size.
Collateral = initial collateral + realized P&L + unrealized PNL. If the sum of the three indicators exceeds the collateral amount, the position will be closed forcibly.
Since the unrealized P&L is dependent on market movements, it continues to fluctuate due to changes in the asset’s price. Therefore, the margin balance also continues to change constantly.
Only that part of the collateral that exceeds the initial loan amount + initial margin can be withdrawn from the account.
Outcomes
Thus, Profit and Loss is an important indicator that allows a trader to determine how effectively he is trading in the market. It can be used for various types of trading on Binance (spot, margin, futures). Cryptocurrency news constantly emphasizes the importance of developing your own strategies in order to minimize the risks when trading. And a tool like Profit and Loss can help with this.
#PNL #trading #Binance
