The Number of Viable Trades, 12/08/06
The number of viable trades in a given time period defines a point of diminishing returns. As the number of viable trades is approached, each new and unique trade that is discovered will require greater and greater effort. At some point, that greater effort will be better spent on developing new systems in new markets or time frames.
Here is a template for estimating the number of viable trades in a given time period:
viable trade count <== trades in time period * available trades * viable trades
Where,trades in time period is the total number of trades available, e.g. 250 for SP dailyExample:
available trades is the percentage of the total trades that can be traded, e.g., 50% for long only
viable trades is an estimate of the percentage of available trades that are actually tradeable, e.g., estimating that 50% of available trades will actually be good setups for tradingviable trade count <== trades in time period * available trades * viable tradesThen,
assume SP daily = 250 trades in time period
assume system/strategy is long only ==> available trades = .5
assume 1/2 of long only are viable ==> viable trades = .5
viable trade count <== 250 * .5 * .5 = 60 (about 1 per week)
Conclusion - the implications of a fixed number of viable trades:
There is a natural ceiling on the number of viable trades in any given time period. Once that viable trade ceiling is approached, it is time to move on to the next time frame or market because you are approaching the point of diminishing returns.