A thin per-trade edge: how many trades to prove it?

Question

A tactic earns an average of 0.04% per trade, with a standard deviation of 0.40% across trades.

Roughly how many trades are needed before the average edge is statistically significant at the 5% level (t of about 2)? Assume trades are independent.

Accepted Answer

Set up the test. For N independent trades, the t-statistic for "the true edge is zero" is the per-trade Sharpe times the square root of the trade count: t = s{	ext{trade}}\sqrt{N}, \qquad s{	ext{trade}} = \frac{	ext{average edge}}{	ext{standard deviation}}. Solve for the number of trades. Requiring t \geq 2: N \geq \left(\frac{2}{s{	ext{trade}}}ight)^2. The per-trade Sharpe is s{	ext{trade}} = 0.04\%/0.40\% = 0.10, so N \geq \left(\frac{2}{0.10}ight)^2 = 20^2 = 400 	ext{ trades}. Interpretation. You need about 400 trades. This is the flip side of the same law: a faint per-trade Sha…

A thin per-trade edge: how many trades to prove it?

Your answer

More Statistics questions