Calculating Profits and Losses for Algorithmic Trading Strategies: A Short Guide

TL;DR

This paper introduces a set of equations to accurately track realized and unrealized profits and losses in algorithmic trading, including the spread, to evaluate trading strategy performance.

Contribution

It provides a formal framework for calculating profits and losses that enhances performance evaluation of trading algorithms.

Findings

Equations accurately track realized and unrealized P&L.

Incorporates spread effects into profit/loss calculations.

Facilitates performance assessment of trading models.

Abstract

We present a series of equations that track the total realized and unrealized profits and losses at any time, incorporating the spread. The resulting formalism is ideally suited to evaluate the performance of trading model algorithms.