Key insights on trade frequency

Trader's Mindset

Aug 28

I have had some key insights into trading frequency on my mind today.

I have had very high win ratio with my discretionary market calls in years past. However, they were always low frequency where I was able to integrate a lot information and analysis into each call.

Generalizing it makes perfect sense that more discretionary style trading needs to be lower frequency because as one increases frequency there is less value to be added with discretion. Likewise, as trade frequency increases it is more important to be statistically profitable which benefits from algorithmic assistance and edge.

As holding time increases, any edge on entry, which is primary trading edge, likely dissipates or falls off while the R factor (reward/risk) increases.

Now, the paradox is that it makes great deal of sense that higher R trades will make it easier to be profitable and provide for more robust results. However, in order to get higher R trades means to increase holding period which decreases any edge. In fact, it impossible to beat the market return over any same holding period on a risk/adjusted basis.

While any entry edge, primary edge, dissipates with longer holding periods, I find it interesting that the probability of the market retouching entry price decreases as price moves away.

I think understanding the above is critical for discretionary style scalping. However, it may also be key as to why long term investing works so well because the R ratios are super high. And, certainly I am thinking beyond day trading edge– because the possibility of getting into a multiple day trade near a low could produce very large absolute profits.

The other importance, with futures, is to understand the management of vertical risk. A very large position in futures realizes no risk provided the market does not move against one. Management of vertical risk can be accomplished with tight stops. Tight stops, however, introduce correlated losses risk!

In general, I think algorithmic assistance will lead to more consistent and robust results over pure discretionary trading, and generally regardless reducing frequency offers many benefits.

On the other hand, very volatile markets do offer increased discretionary scalping opportunity. It is likely because the larger trading ranges provides for better reward/risk skew when expertly managed. It translates into the ability to capture higher R trades.

As for optimal or reasonable frequency, it is largely going to be a function of system specific. On the other hand, it is possible to estimate based on holding frequency. For example, there are 96 5 minute blocks in an 8 hour period. Assuming one can trade the top 5% of blocks only, it translates into around 5 trades per day.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at