Jul 222011

Following two markets, especially markets that are not positively correlated, takes twice as much effort. And so one’s effort is split between the two markets, meaning each market is only getting half of the attention.  This is bound to result in at least a minor performance hit on each market.

Let’s say one can do x pts/day on a single market, but when trading two markets, let’s say that amount is reduced by 1/3 (due to lack of attention, missed trades, etc.).  I’m not sure if it’s 1/3 or 1/4 or 1/2, let’s say 1/3 for now.  So one would make x – 0.33x = 0.66x.

Two markets together would result in 0.66x * 2 = 1.32x which is more than the 1x one would get trading a single market.

Now if the impact is 1/2, then it would be x – 0.5x = 0.5x per market and then for both markets it would be 0.5x * 2 = 1x.  Which means if the hit is 1/2 then it’s the same result trading one or two. So why do the extra work?

I’ve already questioned my practice of trading both Bund & ES.  At first I traded only Bund during European session.  But over the past month or two I’ve started trading ES during Globex and doing quite well at it.  Many days I have 5 pts already before the cash open.

My bund average this month is 5.7 ticks/day, which is less than 1/2 of my average for ES.  It’s hard to make a direct comparison because some of those ES ticks are made during globex and some are made when I only trade ES (during ES RTH).

But I have a hunch that I could do better focusing on ES and if I want to trade a second market, following Stoxx would be much easier since it’s positively correlated with ES.

One more thing that has a big impact – volatility.  With the European Greek debt crisis, the bund has become incredibly volatile.  Stops have to be bigger and it overshoots levels.  Any little news quote can trigger a sudden move of 10-20 ticks in a second.  I’ve been surprised by this a few times this month which is one reason my bund performance is so low.

So putting the two together, I decided to focus on ES and its correlated markets:  Stoxx during European session, and NQ during the US RTH.  That will cut my homework in half and allow me to focus on ES and do much better homework.

As I’ve written lately, my main focus is reducing risk.  If I can get my risk under control (eliminate large losses) then I can increase size.  I feel that’s easier with ES, especially during Globex.

I’ll be writing about the result of this experiment in the future.


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