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Let's assume you are trading a system with a proven edge and an overall positive expectancy. Under the current market conditions, you can expect to earn anywhere from 2-3 points (8-12 ticks) on the ES with this system. You trade using the 2-min chart, you take no more than 1-2 trades per day, and you are trading with 4 contracts on each trade.
Eventually, the market is going to become less volatile.
You backtest your strategy during a year where volatility was dramatically lower. You can identify your same patterns and your same edge, but the market is now only expected to move 1-1.5 points (4-6 ticks) in your favor based on your system.
During this period of lower volatility, would a trader simply increase their contract size in order to make a similar amount of money per trade? Would this trader trade with say, 8-12 contracts per trade, rather than 4?
With futures, do you reach a point where trading with more contracts actually does more harm than good simply because the volatility is lower, and you can’t get filled as efficiently with more contracts? Or is entering with a large amount of contracts not an issue with the ES market?
Or would this trader simply need to learn to trade their strategy on a higher timeframe in order to keep their daily profit goals consistent?
Can you help answer these questions from other members on NexusFi?
I have not traded ES because of network reasons. But I have traded btc, and in the changes in the btc market, I can see a significant reduction in market volatility and liquidity. My previous high volatility strategy was completely ineffective. When btc is in the price range of $40,000-30,000, you can basically use a price fluctuation of $30-100 as a stop loss. When the market moves in the right direction for you, you can get a directional move of $300-1000, and the entire movement process is not The choppy market exists. The price is now near $20,000, but the stop loss needs to be extended to $200-300, which is very counter-intuitive. Usually, the higher the volatility, the larger the stop loss will be, but when the market volatility becomes smaller, the choppy market is very common, and the liquidity is insufficient, the price range of the random fluctuation of the market cannot be set according to the percentage of market fluctuation. A stop loss of $30,000 is at a maximum of $100, a 0.33% price movement. Converted to $20,000, there is a stop loss of $66. If you look at the btc market, $66 is triggered by almost a second of random price movements. In high volatility markets, I basically only trade breakouts and breakout failures. After low volatility, the cost of stop loss increases and the success rate decreases significantly, and the market for breakouts and failures will not have flash crashes and flash pulls, and the market will still be Follow choppy market shock movements. The responsiveness of trading right and wrong can be numbing. But this low volatility will not last forever, and you also don’t know when the market will get rid of low volatility, but the loss and fee cost of trading in a low volatility market while waiting for high volatility to come, it is difficult to be in high volatility. After the volatility market emerges, the previous costs are covered by trading profits. Merely increasing open interest and trading cycles in a low volatility market is completely unfeasible, although it seems logical. I realize this is a good time to switch to trading options volatility. But for the ES market, ES is still in a high volatility market, unless the daily ATR 10 is below 20, I don't think there is any problem with volatility at the moment.
Most longer term futures traders use volatility based position sizing. Using an indicator like ATR, and multiples of, gives you a ball park of the amount the market needs to move to stop you out of your trade. Calculate the stop level (trade risk)- use a total dollar risk amount (I've read 2% of account is common) and divide the total dollar risk by the trade risk to get the number of contracts to trade.
The problem I see is both the multiple of ATR and the period of ATR as well as the 2% risk are all arbitrary numbers which are factored by the psychological risk tolerance of the trader. It discounts the probability of that trade being a winner. What if your system is more likely to book a winning trade during high vol times- when your position size is small. Conversely what if the probability of a losing trade is higher during low vol periods (as my system has) when you have a larger position size.
Back testing and fitting into a previous period which has similarities sounds reasonable, but may not bear out similar results going forward, and runs the risk of over optimization.
Changing your system to a longer time frame is actually changing to a whole new and unique system, whose results may bear little results to the original.
I have learned to allow my system to run- attempting to modify it during volatile times seems to create new unwanted problems. I tested my system over 5 years, and in those times volatility has waxed and waned, in the end I know I just have to ride it out, warts and all.
I think ES on the CME is one of the most liquid instruments on earth.
Granted, time-of-day would make the liquidity vary with 9:00 to 11:00 am as most liquid.
CME estimated settled volume today on the September contract was 1,956,645 contracts with a notional value of $401,116,138,290 !
That's some big numbers changing hands ...........
I believe position sizing is more of a construct of risk profile, as in stop loss settings and risk tolerance, more then a way to normalize profits in lower volatility market regimes. After all who knows how long volatility will stay either higher and/ or lower and for how long.
Volatility is usually there on specific times most of the time, like opening hours.
Then there is news/event based volatility.
Traders want volatility, and option sellers who like to eat premiums don't want it. Both however, are very expectant on rise and fall of volatility as that's what's key for them.
Systems that don't accommodate volatility in them are probably not having so called edge tbh.
Granted, the volatility can change. However, setting stops without getting a rough idea of what it is can result in larger than expected losses or just many, many losses resulting in a low win rate.
