I feel Sharpe should be a byproduct of your trading and not a goal. You goal is always to grow your acct bal quickly while doing it comfortably.
To me, the Sharpe ratio is a result of a combination of BP constraint by the broker and psychological limit on how much losses I can take before questioning myself. For the former, my total positions are constrained by the portfolio margin. So frequently I find myself channeling money from high sharpe but more capital intensive strategies (say spreads) to low sharpe but capital-efficient strategies (say trading directions or trading futures) to relax this constraint. While my sharpe will suffer but hopefully I will make more money.
For the latter as to risk tolerance, 2-3% daily of acct balance swing is too much on a daily basis for me personally. A simple test is that when you start to hide losses from your family, then you are taking on too much risk. So when mkt moves a lot and bar gets longer, I move back to capital-inefficient strategies. Brokers do not adjust margin requirement to VIX. I would have enough BP during those times under my risk tolerance. I probably will make less in those cases, but I sleep better and my running Sharpe improves.
In summary, I believe one's daily swings should be similar in % equity or in $ term no matter how volatile the market or one's trading vehicle is. An exception to the rule can occur due to margin or capacity restriction. However you want to stay in a comfort zone all the time.
njrookie
To me, the Sharpe ratio is a result of a combination of BP constraint by the broker and psychological limit on how much losses I can take before questioning myself. For the former, my total positions are constrained by the portfolio margin. So frequently I find myself channeling money from high sharpe but more capital intensive strategies (say spreads) to low sharpe but capital-efficient strategies (say trading directions or trading futures) to relax this constraint. While my sharpe will suffer but hopefully I will make more money.
For the latter as to risk tolerance, 2-3% daily of acct balance swing is too much on a daily basis for me personally. A simple test is that when you start to hide losses from your family, then you are taking on too much risk. So when mkt moves a lot and bar gets longer, I move back to capital-inefficient strategies. Brokers do not adjust margin requirement to VIX. I would have enough BP during those times under my risk tolerance. I probably will make less in those cases, but I sleep better and my running Sharpe improves.
In summary, I believe one's daily swings should be similar in % equity or in $ term no matter how volatile the market or one's trading vehicle is. An exception to the rule can occur due to margin or capacity restriction. However you want to stay in a comfort zone all the time.
njrookie
