The Law of Large Numbers: as more than 30 or so samples are taken from a non

Gaussian distribution the distribution of the samples is Gaussian! Go figure . .

.
Let us have a look at how the size of returns relates to the frequency at which
we
measure it. Please see the RETURNS file on the CD for details, some of which are
shown in Figures 21.1 to 21.3, below.
The data column was selected at random from our tick database and contains 5714
rows, which we shall use rounded down to 5000.
This has two inbuilt timing parameters:
1. The tick window interval on which the return is taken.
2. The total size of the lookback over which it is calculated.
It is important to note that the returns exhibit mean reversion.Stylistic Properti
es of Equity Markets
95
RETURNS 100T
150
100
50
0
50
1
501
1001
1501
2001
2501
3001
3501
4001
4501
100
150
TICKS
Figure 21.1
From a trading viewpoint we can see what the holding periods will look like at a
return level.
We can also get a view of the absolute maximum number of highest returns at a
chosen holding time.
The following examples illustrate the influence of the tick interval length (tra
de
duration) on return magnitude. Besides these examples please also study the examples on the CD file RETURNS. Tick return analysis is one of our more powerful
analytic tools. Extracting the maximum information from a chart is however more
art than science. Being very careful and super-observant helps. Make sure you ch
eck
that the y axes of comparable charts are the same.
There is much to look out for. Notice the bottom two charts in the Return Charts.
Just by changing the aspect ratio we get a different impression.
In Figure 21.1 we use a return interval of 100T over a total lookback of 5000T.
In Figure 21.2 everything in the previous chart format is constant so that we ca
n
evaluate the comparative changes due to simply extending the return period to 15
0T.
150T RETURNS
150
100
50
0
50

100
150
TICKS
Figure 21.296
The Leshik-Cralle Trading Methods
RETURNS 500T
200
150
100
50
0
50 1
501
1001
1501
2001
2501
3001
3501
4001
100
150
TICKS
Figure 21.3
Notice the rather deeper excursions obtained by changing the return period to 15
0T.
The detailed shape also changes rather subtly.
Figure 21.3 uses a return interval of 500T over a total lookback of 5000T. Thus
we
have a return series which has a much larger window over the same lookback.
Without much analysis we see immediately that the differences in the return patt
ern
are quite drastic notwithstanding the sliding window smooth. This return length
is
longer than we might usually trade and shows an exaggerated view. We have includ
ed
it really only to emphasize the importance of this analytic tool
As you can see from the above rough examples returns are very much at the mercy
of the holding time in this microeconomic area.
This now opens up the Pandoras box of trying to establish an optimum holding
time to maximize the return on the trade. Both volatility and returns are precis
e,
quantitative concepts.
One could think of volatility as firmly entrenched in the lookback, while return
s
are very much a function of the tick length.
Obviously return versus holding time is not a linear function as we are looking
at
convolutions of various drivers of various frequencies and amplitudes, all of wh
ich
also vary in their own right. Complexity at its best.
It is quite surpr