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I know many of you are using a volume based bar chart to trade ES mini SPX futures. Each bar is generated when a fixed number of trades are made, not based on a fixed time interval.
Here comes my questions. How do you choose the fixed number of trades? How the different numbers affect your decision making?
Some people tend to use magic numbers, like 667, but the answer to your question will depend
the moment of the day you want to trade ES.
The goal of a volume chart is to have a feeling, for the rhythm of the market, the pulse
You should not use a volume chart as your only chart, it's more an add-on to the rest in my opinion
What is worth understanding is that futures are designed to take money from small speculators and place it into the liquidity providers hand. Basically, if you trade on too fast of a frequency you won't be able to overcome your fees. This is, again, I think by design. While technically the markets are fair, they are engineered to favor imo the large traders.
At any rate, if it weren't the case of the spread, the best retail traders could obtain the similar types of insane Sharpe ratios that the HFT obtain because the Sharpe ratio will go up as your holding time decreases provided you have even a small edge. There is one case where a large tick value helps you and that is when compared to your fixed trading cost. If your fixed trading costs are high then a larger tick size will allow you to overcome those costs on the provision that you can capture some number of ticks.
However, as you can not take a true fair 50/50 bet -- you must balance your trade costs with your edge. So the frequency you decide to trade on will be determined by your minimum trading costs. The other factor is basically spectral factor or how it looks and behaves. If a certain frequency contains more information you might get better results. I haven't tested what frequencies these are but you can probably guess it would be the dominant frequencies: like 60 minutes.
As you increase your bar time, you increase your risk, add lag, and decrease the number of profit opportunities. So, unless you are finding stronger spectral components then you should optimize your holding period to shortest wavelength that still provides you an edge. The longer you are in the market then the greater your risk basically.
So, you need to look at the average bar size, average true range, for your given volume chart and use that to help you determine if it might be the appropriate volume to use. This is assuming you use the close of the "bar" to trade. This is not required, of course. In which case, it doesn't really matter. Also, some people like that you get more "signal" bars on shorter/faster frequencies that trade that way.
You might think about too, if you are trading on bars, what the dollar size of the bar is. If you want to be able to make a decision you will want the average bar dollar size to be below your stop loss size. You might want to look at the frequency distributions of the dollar sizes of the bars compared to your stop loss value. You can use that as sort of statistical validation that your stop loss is valid and unlikely to be hit.
