Math involved in calculating range to frequency ratio of trade ?

A

Aston01

I have been trying to find some information on the math involved in calculating the optimal frequency to range ratio of target trades.

What I mean by this is if I target $.25 range a trade may present itself 600x a day on a $500 stock. If I bump that range to $.50 the trades would drop to 250x. Bump it again to $1 and all the sudden its only 60x a day.

I understand this occurs, but what I can't seem to find is the math on balancing the frequency, expected return per trade relative to the most efficient use of capital.

Does anyone know what this is called and possibly where I might find a bit more information on the subject
 
It will be a function of volatility, in the trading-range sense. But volatility is often not price-directional. Nor is it constant between trading sessions, or even in trading sessions.

The math isn't that hard, you just have to work through it.
 
I was hoping to find an article or something discussing the topic to shorten the learning curve .

..I type in something "Range Efficiency" or "Optimal Range" even with "Trading" as a keyword in a Google search and I get my fair share of oven related links :)
 
Quote from Aston01:

I have been trying to find some information on the math involved in calculating the optimal frequency to range ratio of target trades.

What I mean by this .....
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Do the iterations. Start with the least range we as retail traders have to deal with. It's usually in the order of 2 ticks. One is profit the other tick for transaction cost. Then, you will say the data doesn't make sense. That's when the head scratching starts, and hopefully you can figure out the rest of the puzzle, the fun part is the puzzle, at least it was for me. Trust me, what your looking for is not good.

BTW .... I'm assuming your using ticks, you will not figure this out with 1 minute data.
 
Well... Here is a stupidly simple way to get started in solving this...

AAPL, H/L Bars, 100 Range in Ticks. 131 Bars Friday. So, there were 131 bars with $1.0 of movement.

IMO this is all quite useless... I don't see how this is useful for trading except to tell you if a stock moves enough during the day to trade or not...
 

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AAPL... Averages around 23 bars of 300 tick movement per day. Actually, that's just recently as everyone has gotten emotional about all time new highs. Normally it's a bit lower...
 

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Quote from RangeTrader:


IMO this is all quite useless... I don't see how this is useful for trading ...
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RangeTrader, I'm assuming this was addressed to me. Things gotta make sense for me to risk money. As an example, 4 things are guaranteed Day1) Insiders sell, Day2) Wallstreet sells, Day3) mom and pop sell, Day4) jstox buys the bounce.

Well, WTF does that mean. Just an old guy babbling but let's get to the tick data. Don't ya want the fastest gun in the arsenal (tick) or do you want an inaccurate bazooka (minute charts). Next, common sense says more opportunities with HFT ticks. Finally, what do ya do with that info. Like I said, things gotta make sense. There is 1 indicator that means something in my world called the Efficiency Ratio. Basically, how efficient does something go from Point A to Point B. Efficiency means trend, inefficiency is my world of chop. Many layers of a system. As an example, if your world is chop best opportunities are 8-10 (PST).

Now, this kinda stuff is extremely 1-dimensional. Let's look a little deeper.

How would you address the algo's if you had the ability to move a tick, basically creating a false 50 CCI xover. What are the obvious places to enter trades? How about when the trend is up and the current price is 1 tick below the last bar. Create that tick move and basically short when everyone is running for the door. How about a second account. If your world is chop you sure don't wanna get caught in a trend so minimize the damage and hedge. On and On .......

I'm done for awhile. HFT needs regulated, pisses me off to see people defend it. Hope I somewhat answered your questions.
 
I use something different for a similar purpose... I monitor the trending/ranging behavior and use something I call the T/R Ratio. Trend/Range ratio.

Market behavior tends to change steadily so as the T/R ratio changes I change my trading approach. If a market is maintaining a Trend/Range ratio of above 25 I only do trend trading. Otherwise below 25 I go toward range strategies.

I subtract the velocity and acceleration from the range to calculate out if the odds of counter trend trades are worthwhile to play. My displayed T/R ratio I use for analysis doesn't account for market behavior changes during trend changes.
 

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Like the climate is easy to predict... Market conditions are easy to predict. But, like the weather... It's hard to predict exactly whats going to happen.

Here is how to understand the T/R Ratio...

If a market moves 20 pips/points over 10 bars... And has a range of 20pips/points over those 10 bars... The T/R Ratio is a perfect 1.0.

If the market ranges 20 pips over 10 bars, and trends 10 pips... The T/R ratio is 0.5. I prefer trading markets with a T/R ratio of 0.25 and under.

The GBP/USD regularly maintains a T/R ratio of under -0.25 on the lower timeframes during European session... Love it! The EUR/USD is more likely to hang out in the +0.35 range...
 
Here is the GBP/USD during lovely low T/R ratio conditions...

Conditions generally change slowly and steadily. If they change just adjust your approach and strategy...
 

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