What is PnL in Trading? Explained Simply

Every market move creates an outcome, gain or loss. In India, average daily trading turnover on the NSE regularly surpasses ₹3,120.56 crore, showcasing why measuring these outcomes accurately matters more than ever. For traders, one figure captures this story in numbers: PnL. This blog looks at what is PnL in trading, how it helps assess trading results, what goes into its calculation, and why it’s central to understanding overall performance.

What is PnL in Trading? 

PnL stands for Profit and Loss (P&L). It is a simple measurement showing how much money a trader has made or lost from their trades. If you make money, it is a profit (a positive PnL). If you lose money, it is a loss (a negative PnL). This number is the most basic way to see if a trade or a trading strategy is successful. Tracking the profit and loss in trading helps a trader understand their performance over a specific period, such as a day, a week, or a year.

How is PnL Calculated? 

P&L is calculated by finding the difference between the price at which an asset was bought and the price at which it was sold, multiplied by the quantity of the asset traded. Any costs, such as fees or commissions, are then subtracted to find the final profit and loss in trading.

The PnL calculation formula depends on whether you are buying first (a “long” position) or selling first (a “short” position).

For a Long Position (Buying first):

PnL = (Selling Price – Buying Price) × Quantity – Costs

For a Short Position (Selling first):

PnL = (Buying Price – Selling Price) × Quantity – Costs

Let’s take an example to understand its calculations better. Say you buy 10 shares of a company at ₹1,000 per share. You later sell all 10 shares at ₹1,050 per share. You paid a total fee of ₹20 for these trades.

• Your Buying Price: ₹1,000
• Your Selling Price: ₹1,050
• Quantity: 10
• Costs: ₹20

Using the long position formula:

PnL = (₹1,050 – ₹1,000) × 10 – ₹20

PnL = (₹50) × 10 – ₹20

PnL = ₹500 – ₹20

PnL = ₹480

Your final profit is ₹480.

Traders track this information in a PnL account or statement, which is a report provided by their broker. This report details all the profits and losses from closed trades, helping traders see their actual performance.

Realised vs Unrealised PnL 

The PnL on your trades can be in one of two states, which include:

Aspect	Realised PnL	Unrealised PnL
Meaning	Represents the actual profit or loss that has been confirmed after closing a trade.	Also known as the floating PnL, it displays the profit or loss that exists on open positions but hasn’t been finalised yet.
Status	Final. Once the trade is closed, this amount is recorded as part of total earnings or losses.	Temporary. It can change with every market movement until the position is closed.
Example	Selling a stock bought at ₹100 for ₹120 results in a ₹20 realised profit per share.	Holding a stock currently valued at ₹120 but not yet sold shows a ₹20 unrealised gain per share.
Impact on decisions	Used for tax reporting, performance review, and reinvestment planning.	Helps monitor open trade performance and adjust stop-loss or target levels.

Understanding the difference between realised vs 

unrealised PnL is important. Your account’s total value (often called equity) includes both your available cash (from realised PnL) and the value of your open positions (unrealised PnL).

Importance of PnL in Trading 

Tracking PnL is essential for serious trading. It goes beyond just seeing a final number; it helps in evaluating and improving trading methods. The main reasons PnL is important are:

1. Performance measurement

PnL is one of the most direct trading performance metrics. It clearly shows whether a trading strategy is working or not. By reviewing PnL over time, traders can see if they are consistently profitable or if their strategy is failing.

2. Strategy evaluation

A trader can use PnL data to check which strategies are most successful. For example, by separating the PnL from different assets (like stocks vs. commodities) or different setups (like morning trades vs. afternoon trades), a trader can identify what to focus on and what to avoid.

3. Psychological insight

A PnL report provides a clear record of wins and losses. This can help traders identify patterns in their own behavior. For example, they might see that they cut profits too short or let losses grow too large, which are emotional decisions that can be corrected.

4. Tax reporting

Your realised PnL statement is required for calculating and paying taxes. Tax authorities need a clear record of your gains and losses from trading for the financial year.

5. Building confidence

A history of positive PnL can build a trader’s confidence in their strategy. Conversely, a negative PnL report is a clear signal that the current approach needs to be fixed or changed.

Using PnL for Risk Management 

A PnL report is a vital tool for risk management in trading. It helps traders protect their capital by showing them exactly where they are losing money. Ways to use PnL for risk control include:

1. Setting stop-loss limits

By analysing past losses, a trader can determine a maximum amount they are willing to lose on any single trade. This is called a “stop-loss.” For example, if a trader sees that their biggest losses were all over ₹2,000, they might set a rule to automatically close any trade that reaches an unrealised loss of ₹1,000.

2. Identifying problem areas 

A PnL report can highlight if a trader is losing too much money on a specific asset, at a certain time of day, or by holding trades for too long. By spotting this pattern, they can stop trading that asset or change their habits to reduce losses.

3. Position sizing

PnL data helps in deciding how much money to put into a single trade (position size). If a trader has a small account and their PnL shows many small losses, they will know not to risk a large portion of their money on one idea.

4. Calculating risk-to-reward 

Traders can review their PnL to see if their winning trades are big enough to cover their losing trades. A good risk management strategy aims for profits that are significantly larger than losses (e.g., aiming to make ₹3 for every ₹1 risked). PnL data shows if this is being achieved.

Common Mistakes in PnL Calculation

While PnL seems simple, traders sometimes make errors in how they understand or calculate it. Common mistakes include:

• Forgetting trading costs: Calculating PnL based only on entry and exit prices. This ignores commissions, spreads, and financing fees, which can turn a small profit into a net loss.
• Ignoring unrealised losses: Focusing only on realised profits while letting unrealised losses grow. An open loss is a real loss to your account’s total value (equity), even if it is not yet “locked in.”
• Misunderstanding leverage: Using high leverage can make PnL numbers look very large, both for profits and losses. A mistake is not understanding that your PnL is based on the total position size (your money plus borrowed money), magnifying the risk.
• Confusing pips, lots, and dollars: In markets like Forex, traders can get confused about how a move in “pips” (a small price change) translates to a dollar PnL, because it depends on the “lot size” (the trade size).
• Mixing timeframes: Comparing a single day’s PnL to a whole month’s PnL without context. It is important to evaluate PnL over a consistent period to get a better look of performance.

Conclusion

Answering what is PnL in trading is simple, but using it wisely is the main thing. Your PnL is the ultimate measure of your performance. It shows you exactly what works and what doesn’t. Paying close attention to this single figure helps you manage risk, stay accountable, and make smarter decisions to protect your capital.

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