End-of-Day Versus Intraday Trading (Part 3)

This blog series was supposed to be complete after two posts. However, my recent discussion on transaction fees feeds right back into it so I will briefly restate some ideas with the addition of something new.

One way to effectively eliminate slippage is to enter a good ’til cancelled (GTC) closing order for the profit target. With the exception of gaps, this should take me out at +10%. What gets obscured is the fact that this order won’t usually be executed until/unless the midprice goes above +10%. For example, when the order triggers at +10% the midprice may actually be +12%. This [slippage] increases trade duration, which is similar to the negative initial PnL due to transaction fees that I discussed in the last post. The saying “time is money” has never been more true.

Trading live using a GTC order would result in a greater percentage of winners at a lower average ROI. I detailed these points in the first two parts of this blog series. To quantify how many losers might become winners, I could sort the losers by MFE; MFEs falling just short of the profit target are good candidates to become winning trades if exposed to intraday price volatility.

In terms of “something new,” I recently considered tracking the second-largest adverse excursion (SLAE). One way to analyze potential stop-loss (SL) levels is to plot MAE vs. MFE. Of all the trades with an MAE beyond a threshold level, if only a few have MFE at/above the profit target then I incur minimal risk by using that level as a SL. Many times the SL would be triggered the day before MAE is reached. Collecting SLAE data would prevent me from having to go back and retest these losers.

The problem with this idea is that trade PnL will not necessarily be SLAE when using a SL. SLAE works in a particular instance where the market is trending and a trade would be stopped out for a smaller loss the day before it would otherwise reach MAE. The SL could be triggered any number of days before MAE would be otherwise reached, though, which renders SLAE useless. Also, in choppy markets the stop-out day and MAE day may be far away in time.

SLAE is an interesting idea but not one I will add to my backtesting spreadsheet. Collecting SLAE data would take a lot of time and I can easily imagine many losers still in need of retesting with the profile of intratrade PnL being so highly variable.