Trading currencies via online trading platforms has given unique opportunity to retail Forex traders to execute their orders with real time rates so fast and accurate. Even by applying programmed strategies it might be done faster than manual actions to click on sell/buy (soft) buttons. Technology has a key role to make a fast -actually very fast- environment for FX traders.
In this environment opening and closing positions quickly is a popular method which is known in extreme cases with minimum holding period as Scalping.
This little study is trying to understand if the holding period of a position may have any effect on the risk and return. To dig about this an hourly data series of USDJPY rates from January 2002 to December 2011 (10 years) is prepared. Then USDJPY’s risk and return in 8 different portfolios are studied, while time horizons are including Hourly, 5 Hour, 10 Hour, 24 Hour (Daily), 72 Hour (3Day), 120 Hour (Weekly), 528 Hour (Monthly) and 1584 Hour (3 Month).
The idea for each portfolio is identical just holding period in each portfolio is different. In example; for Hourly portfolio USDJPY is sold then is bought in an hour (closing the position) and new position is taken till next hour…this process has ran for all 10 years (overlapping).
It should be mentioned that all positions are SELL USDJPY. It’s like a trader is getting in and out of the positions (Short positions) hourly (or 5H, 10H, 1D, 3D, 1W, 1M, 3M) for whole 10 years constantly (Overlapping).
To understand how much would be gained for an imaginary trader at the end of 10 years; cumulative results for each portfolio are reflected on below table.
As it’s reflected in above table, longer holding period is bringing higher return. Actually the imaginary trader could make more than 8.5 million pips by keeping open Sell positions for 3 months (working days are considered). While keeping USDJPY sell position for an hour could bring just 5 thousand pips!
But it is not all! What would happen for the risk and also risk to return ratio? Does it really worth to keep USDJPY positions for longer period of time?!
First , its needed to see how much return each portfolio has made in average. Due to this target, avergae profit/loss of each portfolio is considered during the ten years. As it’s expected longer horizion of time have had higher profit. In average, by increasing holding period profit is increasing step by step from hourly to 3 months portfolios.
To obatin the risk of the portfolios in this case, standard deviation of profits/losses might be known as the risk.
Similar to the return, by increasing the holding period risk is going higher and higher. The riskiest portfolio belongs to the portfolio with longest holding period (3 months) while, minimum observed risk belongs to the portfolio with shortest holding period (Hourly). This fact brings the considerartion about risk to reward ratio. Does it worth to accept higher risk for more possible profit?
Although by longger time horizon risk and return both increasing in USDJPY case but acutally the return is increasing faster. By compraing risk to return ratios it can be seen that from hourly to 3 months portfolios the reward of each unit of risk is rising.
In other words, if a trader considers just higher profit for trading USDJPY, longger holding period might be a better option. But if the priority is based on the risk aversion, shorter holding period can be recomanded. In General, longger holding periods not only bring higher possible profits but also the risk to reward ratios indicating that longer horizion may worth more than short term!
Similar study is done for USDJPY during first two months of 2013 (January and Feburary), with hourly to 5 days holding periods. But this time buy position is considered because USDJPY was rising on that time. Results are reflected in belwo table which are similar with findings about 2002 to 2012.