Quote from intradaybill:
Profit factor cannot translate to actual profits. It tells nothing about profitability.
Profit factor already includes all trades. Profit Factor is the sum of all profits divided by the sum of all losses. It tells you everything about the edge. How much your total profit is, is very unreliable.
Do you think that someone who had 5 bucks of winners and 1 buck of losers is better than someone who has 1M of winners and 0.5M of losers? The former has a PF of 5 and the latter a PF of 2.
This example really does not prove anything. If someone had $111 billion of profit and $110 billion of losses, would he have made a billion? It would be eaten up in commissions, fees and other costs.
Edge, the way I defined it in my post, translates to profits directly by multiplying it by the number of trades. Then you divide by your capital and you get your rate of return.
The number of trades is practically irrelevant. After getting something like Profit Factor, you must then calculate slippage, commissions, fees, risk, errors in judgement and a lot of other things. You then need to subtract all this and see if you are still reasonably above a PF of 1.0.
Max drawdown by itsef is not an edge. Otherwise, T-Bills would be the best edge around.
max DD, Sharpe, and other stats are measures of the reliability of an "edge" not an edge themselves.
True Profitability depends on what kind of advantage you have in the way of wins as compared to losses, after all trading costs and risk is removed. Again, PF, max DD, Sharpe and other stats serve this purpose well.
