Indicators Based on Potential Profit

Potential profit and its corresponding strategies combine profitable price moves and efficient money management. They depend on prices, transaction costs, and account maintenance rules determined by the futures industry. This makes them rich concepts that transform market information into the form that allows us to achieve our final goal. Let us consider various applications and their relationship to other trading concepts.


Profit Performance of a System

As suggested by Robert Pardo (1993), performance of a model (trading system) or a trader can be measured by the ratio of the achieved profit and loss (P&L) to the potential market profit:


Because transaction costs cannot be excluded from actual trading, it is important to include their effect. This leads to two results: not all trades suggested by Pardo's algorithm can be profitable, and the profit obtained from the rest of trades is reduced by transaction costs. To evaluate the ratio, one needs to use the same time interval for both the actual P&L and the potential profits. It is also important to use the same initial number of contracts. The three principal algorithms proposed in this book apply an initial number of contracts as a parameter. If trading is done in such a manner that at any moment an open position has the same absolute number of contracts, ...

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