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Trading correlated markets
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Trading correlated markets

  #11 (permalink)
Fortitudo et Honor
Austin, TX
Trading Experience: Advanced
Platform: TradeStation
Favorite Futures: Futures
Posts: 882 since Mar 2011
Thanks: 128 given, 711 received

There is an operable reason and that's saturation.

If you have a particular strategy and you become "saturated" then it's obviously time to move into other markets and being corresponding markets behave more similarly, it only makes sense.

i.e. once you begin trading at a high enough positionsize where slippage becomes untenable, your strategy is becoming saturated.

You can't continue to grow forever, eventually you'll get to the point where the slippage overcomes any additional increase in positionsize.

Obviously there's a sweet spot for instruments that charge per trade (because trading the same amount of shares split over 2 instruments simply increases your commission burden). But for per contract instruments, the only disadvantage is "span of control." (i.e. you have to tend to 2 different smaller children instead of 1 large one).

For strategies that scalp a few ticks here and there, this can become a real issue after only a few contracts/additional shares....

For example, if you're trading MANY times a day and eeking out a small profit on each, then additional slippage effects you much greater than the strategy that trades once or twice a day and makes larger profits. A net $15/trade strategy will obviously feel the pinch more than a net $250/trade strategy. (even if both are pulling in the same bottom line each day).

Additionally, "diversifying" in corresponding instruments can also free up your strategy to slippage/volume considerations.

i.e. you might be able to trade at certain hours/volumes using 2 contracts on 3 similar instruments, but you might find that strategy is untenable during the same conditions using 6 contracts on one instrument (or at least, more prone/risk centric to slippage).

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