Asset 'drift' and return distribution are dynamic forces, constantly changing as market characteristics change on the basis of volatility. Therefore asset sensitivity or amplitude of directional movement is never constant, nor is it linear or 'Brownian'. When trading systematically, I can't just aggregate historical returns over extended time periods and project forward with certainty. I isolate return periods on the basis of historical market condition as a framework of analysis specific to that condition, so as to create future expectations within similar structural conditions. Therefore, return distribution will have differing skew or kurtosis depending on time period selected for. That's my way of assessing strategy 'alpha'; looking at performance within market conditions as independent structural entities as opposed to aggregating broad, historical data samples across time as an annual performance measure.
Volatility begins as changes in levels of activity (price movement) at the smallest unit of time, subsequently embedding into larger time periods as an established bias, giving way to trend or directional movement. Volatility isn't just a linear phenomenon that emerges from month to month - it clusters and scales.
Price sensitivity is not just isolated to a specific trading period (monthly, weekly, daily, minutely, etc) - it permeates the entire spectrum dynamically; heightened monthly price activity is accompanied by increased hourly, and minutely price activity and so adjusting our risk and money management systematically through trading time must be synchronized.
If we take the Nasdaq 100 mini futures contract (NQ) from Feb 11' - July 11' we have an embedded sideways monthly structure or condition with a range defined by price levels 2280-2400 that encapsulated trading activity. August and September (11') monthly trading range expanded to 2395-1972 = 423 points of activity. Traders must now contend with a waterfall effect of volatility into the smaller units of time. This will impact performance (risk-adjusted returns) and return distribution. The May-Aug 2010 market condition in the NQ contract can provide a comparable measuring stick of performance. How did you trade the mini's in that timeframe?
