Curious about traders "edge."

Discussion in 'Risk Management' started by CheckM8t, Apr 12, 2011.

  1. CheckM8t


    Many traders in many threads reference their edge. I'm having a hard time understanding what exactly an edge is since a lot of what I read says no strategy is better than 50/50 in the long run.

    Can an edge simply be strict discipline, effective risk management or profit maximization when a trade is proven correct?
  2. Occam


    Edge might be defined as "positive expected value from the strategy". By that definition, it's largely independent of discipline or risk management, although lack of these two could easily torpedo a good edge.

    By the way, "better than 50/50" is largely meaningless in this context, as the returns of investment strategies are hardly ever (if ever) symmetric.
  3. 1) Discipline and risk management are applied to the "edge", they are not the edge, itself. :eek:
    2) The edge is rooted in your trading strategy. :cool:
  4. You must be reading stuff written by mediocre traders :)

    There are certainly traders who have a much higher win rate than 50%

  5. An edge can be anything that you can prove to yourself has given you a statistical advantage in your trading.

    Thus, using your "strict discipline" example, if you have statistical results that show your trading improves when you're discipline (following your trading plan) in comparison to when you're not discipline (not following the trading plan)...

    Your discipline is an edge.

    By the way, most traders don't reach the long run and most likely their method itself is not 50/50 but I did understand your point.

    Thus, some traders only look at their entry signal for an edge. That's ok while other traders may think their method needs a kick and decide to their edges elsewhere (e.g. trade management after entry, money management, market experience, discipline, trading environment, stress management and so on) without making any changes in their entry signals.

  6. I'm no expert, but here is my take on the "edge".

    It is largely a concept purveyed by those who in some way profit off of the "secrets, little know truths and arcane calculations" that keep the bait fish coming back for more.

    Simply put; all markets move up and down and those movements generally balance out over time. Your job as a trader is to make some sense of those movements and capture some of it and put it in your pocket.

    Ok, now whatever you do to that end, your choice of entry, exit, money management, break for lunch, how you time your bathroom trips, your unique reactions to profit and loss, etc. everything about you and your trading that puts that coin in your pocket is your "edge".

    It is not some elusive quantity that your mind suddenly grasps and a lightbulb goes off and poof, youve got edge!. It aint that complicated.
  7. When I started working in the early 70s the term “edge” was widely used in general business (that is long before trading took on the term). It originally came from the fact that a business had a big advantage over its completion because of things like innovative products or successful advertising.

    So business people in that era often spoke at business conferences about their businesses as having an “edge” up on the competition. Saying they had an edge it meant they were recognized as a leader in the markets they sold in.

    For a trader to have an “edge” today I believe it is similar to the definition above. It means in the market a trader places trades, using whatever method in any market condition, that they can be profitable and successful in their trading business no matter what type of trader is on the opposite side of their trade. Having an edge means beating the other trader to the profits using your business plan.
  8. Very vague term indeed. You can have an edge and still get wiped out. A proper trading edge must include a profitable trading method plus risk and money management. It is also depended on skill and psychology. Too complex to define IMO.

    Below is a link to one of the best references on the subject I have ever seen. It has two parts I and II. It worths reading because the author shows that expectation is mathematically equivalent to the statement that the net profit is greater than zero. In other words, if someone trades and makes money expectation is positive, necessarily.
  9. CheckM8t


    Thanks for the responses...I get it now. There was one comment from Occam I didn't quite understand:

    "By the way, "better than 50/50" is largely meaningless in this context, as the returns of investment strategies are hardly ever (if ever) symmetric."

    I've read several times and places that the best win/loss rate a trader can hope for is (roughly) 55/45, long term, and the rate in and of itself is meaningless. Success in trading is all about trade management, R/M and M/M. Even a strategy that is wrong 60% can still produce nice profits.

  10. After you have traded for awhile you will see the winning and losing percentage become irrelevant if that is all you are looking at. They really only have meaning when combined with the average winning trade amount and average losing trade amount in the expectancy calculation for your strategy. It is a higher positive expectancy you hope to achieve not a higher winning percentage.

    #10     Apr 13, 2011