Choosing Trading Speed by Balancing Returns and Costs
Summary
The document explains how to choose a trading frequency by comparing expected pre-cost performance with holding and execution costs. It distinguishes market-order traders, who may pay about half the spread, from traders using limit orders or execution algorithms, who may reduce that expense. It also describes estimating trade counts from a stop-loss sized relative to volatility, then examining how holding periods and moving-average rules affect performance before and after costs.
A proposed speed limit sets maximum annual cost at one third of expected Sharpe ratio. Subtracting holding costs from that allowance and dividing by cost per trade yields a maximum number of trades. A Eurodollar example supplies specific holding and trading cost inputs and plots actual versus permitted trade counts across trading rules. The document cautions that expected returns are uncertain, illustrating confidence bounds around performance estimates. Its formula is a rule of thumb, and the excerpt does not provide the plotted values or enough detail to reproduce the full calculations.
Key ideas
- Trading speed should reflect both expected returns and the costs incurred per trade.
- Execution methods can change the share of the bid-ask spread paid.
- A volatility-scaled stop-loss can help estimate the number of trades.
- The proposed speed limit caps annual costs at one third of expected Sharpe ratio.
- Uncertainty in expected returns affects how confidently the cost limit can be applied.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.