A strong per-trade edge: how few trades to confirm it?

Question

A signal earns an average of 12 basis points per trade, with a standard deviation of 30 basis points 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}} = 12/30 = 0.40, so N \geq \left(\frac{2}{0.40}ight)^2 = 5^2 = 25 	ext{ trades}. Interpretation. Only about 25 trades. A strong per-trade Sharpe of 0.40 needs very little data to reach significa…

A strong per-trade edge: how few trades to confirm it?

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