How to calculate Kraken contract profits

Kraken Contracts' margin trading and commission structure, coupled with funding rates, all contribute to the complexities of calculating potential profit and loss, necessitating careful consideration.

Nov 18, 2024 at 10:56 am

How to Calculate Kraken Contract Profits

Step 1: Overview of Kraken Contracts

• Kraken Contracts represent a type of derivative financial instrument available on Kraken, a leading cryptocurrency exchange.
• These contracts mimic the underlying asset's performance, including cryptocurrencies, commodities, and traditional financial instruments.
• Traders can engage in margin trading using Kraken Contracts, enabling them to hold leveraged positions and potentially amplify their gains or losses.

Step 2: Calculating Profit Loss for Perpetual Contracts

• Perpetual contracts are open-ended futures contracts without an expiry date.

• To determine profit/loss for a perpetual contract, follow these steps:

  • Initial Trade Value: Calculate the value of the position at the time it was opened. Multiply the contract size by the entry price.
  • Current Trade Value: Calculate the value of the position at the current market price. Multiply the contract size by the current market price.

  • Unrealised Profit/Loss: Subtract the initial trade value from the current trade value.

    • Positive value indicates unrealised profit.
    • Negative value indicates unrealised loss.

  • Realised Profit/Loss: To realise profit or loss, the position must be closed. Exit the position by placing an opposite order.

    • Close Value: Determine the close value of the position using the contract size and exit price.
    • Profit/Loss: Subtract the initial trade value from the close value.

Step 3: Commission Structure on Kraken Contracts

• Kraken charges commissions for each contract trade.
• The commission structure varies depending on the type of contract and whether it involves a maker or taker.
• Commissions are typically calculated as a percentage of the notional trade value.
• These fees can impact the overall profitability of your trades, so consider them during calculations.

Step 4: Funding Rates and Indicative Funding Rates

• Funding rates and indicative funding rates play a role in the profit/loss of perpetual contracts.
• Indicative funding rates indicate the potential financial cost or benefit accrued while holding a position overnight.
• If the indicative funding rate is positive, traders holding long positions may earn funding payments, while those holding short positions may pay funding.
• If the indicative funding rate is negative, the opposite occurs.
• Actual funding rates may differ from indicative funding rates once the system executes the funding changes.
• Consider funding rates when holding positions overnight. Positive funding rates can benefit long positions, while negative rates can benefit short positions.

Step 5: Margin Trading and Liquidation

• Margin trading allows traders to place trades with leverage, increasing their potential profits but also amplifying their risks.
• Kraken allows margin trading for contracts up to a maximum of 50x leverage.
• Regular margin adjustment is crucial to avoid liquidation. If the available margin drops below the maintenance margin level, a liquidation event may occur.
• During liquidation, the positions are automatically closed to cover the losses, leading to a forced exit from the trade.
• Manage risk by using appropriate leverage and monitoring margin levels closely.

Step 6: Other Factors Affecting Profit/Loss

• Besides trading fees and funding rates, several other factors can influence contract profitability.
• Market volatility can significantly impact profit/loss. High volatility can lead to rapid profit/loss fluctuations.
• Keep in mind that historical performance does not guarantee future returns. Conduct thorough analysis and research before making trading decisions.
• Avoid impulse trading and understand the risks associated with leveraged trading.