How Tradeable Is a Market?
Everyone seems to have a favorite market, sector, or stock. The justification for this preference is often arbitrary– being a function of time zone, past trading successes, or a preference for market behavior. One question many traders fail to ask is: How tradeable is a market? The truth is that not all markets offer good opportunities to make money. A poor market will have: 1) low and sporadic liquidity 2) a high but unpredictable degree of noise 3) few if any discernible patters or anomalies. Measuring how good a market is cannot be biased by trading style, it should consider the overall profitability of different types of trading methods. The only way to do that is to create a diverse set of quantitative strategies and test the average and maximum profitability that could be achieved by different styles. This diverse set should be spread across varying parameters to be useful for generalization. At this point, we can calculate one key component in determining how tradeable a market is by looking at the PQ or Profitability Quotient:
PQ= (average or maximum annual points won across strategies or within the best strategy category)/total possible annual points available
where the annual points available is the sum of the absolute value of the daily changes in closing prices over 252 days
The PQ can be used to compare markets, where the higher the PQ the more tradeable a market is likely to be assuming liquidity is sufficient. A high PQ suggests that the market offers either abundant alpha across many different strategies, or contains one strategy category that is highly lucrative.