Modeling Maximum Trading Profits with C++

CHAPTER 7

Direct Applications

Whether traders just dream about big profits or actually set them as personal goals, they should know what “big” is—the limit that can beachieved. The three variations of the best profit strategy developed on the roadto this chapter uncovers what the market can offer. It answers the question:“What is possible?” In this chapter, the strategies will be applied to realmarket data.

ONLY IN THE PAST

The potential profit andcorresponding strategy are market properties. As with any other marketproperty, they can be obtained only over a past time interval.

What Are Traders Actually Doing and How Are They Doing It?

When a trader calculates moving averages of historic prices;builds support, resistance, and trend lines; analyzes price gaps; observes theappearance of trading patterns (Elder 1993); follows the Commitments ofTraders Reports (Williams 2005); rationalizes the usefulness of volume and openinterest (Shaleen 1991); or works in accordance with Fibonacci retracementlevels, he always applies these calculations and techniques on past data. Thispast may include today's date—but only after the market closes!

From time to time there are markets that show a strong correlationbetween the closing price direction and a price move at a different time. Forexample, the “wild card play” (Hull 1997) is a situation in which an “option”is given to the party holding the short position based on the fact that the pitsession for Chicago Board of Trade (CBOT) Treasury bond ...