CHAPTER 2
Calculating Profit
Although we haven’t discussed it explicitly, by now it shouldn’t be too hard to
understand why net profit is not a good optimization measure to judge a system
by. Remember, a profitable system doesn’t necessarily have to be a good system,
no matter how high its net profit. It’s all a question of which market you apply the
good system on and how aggressively you trade it.
But to clarify things a little further, let’s start out with a little analogy. Imagine
a downhill skier on his way down the slope to the finish line. About half-way down
the slope, there’s an interim time control. Let’s say the skier passes that control after
one minute, eight seconds. If the interim time control is one mile down the slope,
then the skier has kept an average speed of 53 miles per hour. Now, although we
need the interim time to calculate the average speed, it is not the interim time that
gives the average speed; it is the average speed that gives the interim time.
Compare the above reasoning with the statistics of two trading systems that
you have tested over the last 10 years. Halfway through the testing period, both
systems show a net profit of $100,000. The only difference is that one system
made that money in 250 trades, while the other one made it in 500 trades, for an
average profit per trade of $400 and $200, respectively. Which one would you
rather trade, knowing nothing else about these systems? I don’t know about you,
but I would go with the one that made the most money the fastest, with the speed
in this case measured in trades instead of hours or days. That is, everything else
aside, I would go with the system with the highest average profit per trade. At the
very end of the testing period, the same reasoning applies, because even though
you have reached the end of the testing period, it is still only an interim point in
your life and career as a trader.15Copyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.