When choosing a trading system, it is necessary to consider the frequency of trades. This could increase your profit factor and give you more trading opportunities.
The advantage of a frequent trading strategy is that if it is a profitable trading strategy, it will have a higher return the more times it trades, using a lower leverage. This is stating the obvious, but it is often overlooked when choosing a trading strategy. The goal is to make more profit using the least amount of leverage or risk.
The frequency is important in choice. For example, given two trading systems, the first with a higher profit factor but a low frequency, and the second a higher frequency in trades but with a lower profit factor. The second system might have a lower profit factor, but because of its greater frequency in trading and taking little profits, it can have a higher total profit, than the system with the lower frequency and higher profit factor on each individual trade.
Frequency represents an opportunity for profit.
An active system can give you a greater number of trades but at the same time it produces a data set that we can rely on more than an infrequent trading systems. For example, let's say we would like to analyze a moving average system that produces 50 trades in 5 years and analyze a day trading system that produces more than 1000 trades over the same period of time. The data produced by the day trading strategy will give us more confidence that the moving average system. Therefore we would prefer choosing the day trading system, being the testing more reliable.
Active systems should produce more reliable results and a smoother equity curve. If a coin is flipped ten times, our odds of having 50% heads and 50% tails are not very good. Instead if we flip the same coin one thousand times, we have a greater possibility of obtaining 50% heads and 50% tails. The same logic applies to our real-time trading. The larger the sample the closer the results would be to our expectations.
The active system will approach our expectations much quicker than the system that trades infrequently. If a trading system produces 50 or more trades per month, having a good system will be more likely to reach our profit target at the end of the month. The system that produces only three trades a month, it will take much more times to reach our desired results and will be less predictable and more inconsistent.
In summary:
1. Active systems have bigger samples in testing and make test results more reliable.
2. Active systems give more opportunity for profits and produce more total profit over time.
3. The equity curve is smoother in an active system.
Therefore when choosing a trading system, you should give higher frequency systems a greater priority.
How to increase trading frequency:
1. Use more sensitive parameters; this means using shorter parameters for the indicators that determine the entries and exits.
2. Taking more frequent profits, will increase the number of trades but may reduce the average profit per trade. In the long run this may prove more profitable.
3. Trade more than one market. Diversify in other markets, hedging risk.
4. Use multiple trading systems. Trade as many profitable systems as possible, increasing your activity level.
5. Trade multiple time frames. A system that works on a 15 minute chart should work on an hourly chart.
One last thing, don't forget that an increase in trading frequency will increase your trading costs. Keep in mind these costs when choosing which strategy to apply and when actually back-testing your strategy. You must also understand at which point a high number of frequent trades actually decrease the profitability and at which point they increase your profitability. This will take a bit of time for back-testing but it is surely worth it.
The advantage of a frequent trading strategy is that if it is a profitable trading strategy, it will have a higher return the more times it trades, using a lower leverage. This is stating the obvious, but it is often overlooked when choosing a trading strategy. The goal is to make more profit using the least amount of leverage or risk.
The frequency is important in choice. For example, given two trading systems, the first with a higher profit factor but a low frequency, and the second a higher frequency in trades but with a lower profit factor. The second system might have a lower profit factor, but because of its greater frequency in trading and taking little profits, it can have a higher total profit, than the system with the lower frequency and higher profit factor on each individual trade.
Frequency represents an opportunity for profit.
An active system can give you a greater number of trades but at the same time it produces a data set that we can rely on more than an infrequent trading systems. For example, let's say we would like to analyze a moving average system that produces 50 trades in 5 years and analyze a day trading system that produces more than 1000 trades over the same period of time. The data produced by the day trading strategy will give us more confidence that the moving average system. Therefore we would prefer choosing the day trading system, being the testing more reliable.
Active systems should produce more reliable results and a smoother equity curve. If a coin is flipped ten times, our odds of having 50% heads and 50% tails are not very good. Instead if we flip the same coin one thousand times, we have a greater possibility of obtaining 50% heads and 50% tails. The same logic applies to our real-time trading. The larger the sample the closer the results would be to our expectations.
The active system will approach our expectations much quicker than the system that trades infrequently. If a trading system produces 50 or more trades per month, having a good system will be more likely to reach our profit target at the end of the month. The system that produces only three trades a month, it will take much more times to reach our desired results and will be less predictable and more inconsistent.
In summary:
1. Active systems have bigger samples in testing and make test results more reliable.
2. Active systems give more opportunity for profits and produce more total profit over time.
3. The equity curve is smoother in an active system.
Therefore when choosing a trading system, you should give higher frequency systems a greater priority.
How to increase trading frequency:
1. Use more sensitive parameters; this means using shorter parameters for the indicators that determine the entries and exits.
2. Taking more frequent profits, will increase the number of trades but may reduce the average profit per trade. In the long run this may prove more profitable.
3. Trade more than one market. Diversify in other markets, hedging risk.
4. Use multiple trading systems. Trade as many profitable systems as possible, increasing your activity level.
5. Trade multiple time frames. A system that works on a 15 minute chart should work on an hourly chart.
One last thing, don't forget that an increase in trading frequency will increase your trading costs. Keep in mind these costs when choosing which strategy to apply and when actually back-testing your strategy. You must also understand at which point a high number of frequent trades actually decrease the profitability and at which point they increase your profitability. This will take a bit of time for back-testing but it is surely worth it.