Monthly Archives: March 2015

Executing to size

One critical thing in assessing the value of a trading system is the executable size. By that I mean the total volume that you can trade a system on the market. As you approach larger amounts, it becomes harder to make money(although if you have a lot of money and buy/sell on up/down bars it may become easier as your position is affecting the supply/demand balance of the market in your favor). This happens because there is limited liquidity on the market and you start pushing prices against you with larger volume. The key to executing a large position on the market is spreading out the position in smaller positions over a time.

Executable size is very much dependent on the time frame you are trading and your manner of entering the market. Trading on a higher timeframe vastly increases the executable size. First, you can afford to pay a higher spread and push the price against you more because you are aiming for larger % movement for profits. Second, you can spread out your position over a longer time period. But there is also an add on effect in that higher time frame systems are less prone to decay as because there is less competition from other people and the effect of the competition is minimized over time of execution. You can also drastically increase executable size if you are looking at buying into weakness and selling into strength. But this is harder to execute and requires a special form of strategy.

There is a big difference between me and 99% of other traders out there in that my methods have a very large executable size. Most people trade off the 5-15 minute timeframes. My calculations show that such systems on EUR/USD can only yield profits up to $100M a year. All my methods trade off the daily time frame. I can spread out my positioning over a whole day. For calculating the profits from my trading system I assume that I can execute up to 5% of daily volume without pushing prices too much against me. My calculations show that this yields a profit potential of $30B+ a year with my current systems.

This brings me to my final topic. How much is it possible to make off the foreign exchange markets? I think realistically it is possible to make $1-2T a year easily off FX. To do that you’d need to mainly focus on trading the weeklies. Daily FX turnover is $5T. That gives a monthly turnover of about $100T. Lets say you spread out positioning over 2 months. Lets say you can execute up to 10-20% of daily volume either through bids/offers or ordering at market. That gives you $10T-$20T position size. Lets say you can make 10% unleveraged a year with your systems. That gives $1T-$2T a year.