Technical Analysis of Gaps: Identifying Profitable Gaps for Trading

Chapter 4. How to Measure Returns

How do you tell whether a given investment strategy is worth following? Although this seems like a simple question, it isn’t. Suppose your friend Daniel tells you that he has developed an incredible trading strategy. He tells you that he made a 20% return on ABC, a 25% return on DEF, and a 35% return on GHI over the past month! Daniel offers to share his strategy with you so that you, too, may enjoy these gains. Daniel’s returns do sound impressive, but, unfortunately, it isn’t that simple. As we look at how we measure returns, we must also consider two other important factors: luck and risk.

Calculating Returns

With this discussion as backdrop, let’s now turn to how we measure the profitability of gap-based ...