I am a developing trader who is just coming out of a phase of experimenting with algorithmic non-discretionary trading. With that approach, knowing what your edge is can be directly quantified with proper back testing. Since then I have abandoned systems trading because I became frustrated with the non-discretionary aspect.....a.k.a ignoring context all together. (and the seemingly inescapable obnoxious drawdowns based on dumb trade after dumb trade). I now am focused on trading with discretion based on market structure context and price action. My question is, as a trader who is making trades based on each specific situation, how do you define what your edge is? You can't back test discretionary trading. You can back test the individual structures/ profiles that you will base your opinion of context on. However, that is just the same as back testing multiple algorithmic signals and then thinking that merging them together makes for a stronger signal. Then you are back to square one where you only have an edge if you follow the signals without discretion. So, again, as someone who trades with discretion, what is your edge?
There are many who over think trading. The markets can be unpredictable. No system or back testing will make you profitable. It's all 50/50 until you break even or go broke. Enjoy!
edge for a discretionary trader (the definition of alpha or the definition of the value of your seat) can be explained in words. Warren buffets edge is that short term thinking creates long term entry points for him. His real edge is his reputation and the access to deals that it gives him. A risk arb's edge will be the risk premium associated with deals. His real edge would be perhaps his connections in the FTC.
I personally don't like to use the word edge ... it sounds like a fake, cheesy, gimmicky, fictional marketing term. There's just skill and experience and wisdom -- and everything else opposite of that Everyone around here mentions Edge...like it's The Holy Grail in Indiana Jones...i kind of find it rather hilarious, But to answer your question...when that light bulb (finally) goes off in your head...that will be your Edge
Well yes..... "edge" is a little silly. However, when there is a discussion about knowing what your's is as a trader, the context holds more water. I think it is really important for a trader to understand SPECIFICALLY WHY they think they will win a zero sum game with consistancy. As I formulate my strategy as a discretionary trader, part of that process is defining WHY I expect it to work. That is more complex than it seems. It seem like a cop out to just say..."oh, I expect to win because I know a lot about technical analysis"....... or even to say something like..... "l expect to win because I have spent over 1000 hours watching and analysing markets"(which I have not done yet, but plan to do). That being said, the true edge as a discretionary trader probably closely resembles my second statement. I think that's the catch. No one can teach you to read market context. You have to do your own work. @lawrence-lugar .. .. bravo on the Indiana Jones reference.
This is my generic way of saying: what is the big picture (long time frame ----> intraday)? What is the underlying status of the "auction"? What are my hypotheses for what will happen next?
Sounds like you are still following price. Classic follow up question is what happens when your context and price diverge. You know the correct answer but can you do it. ( Brexit rocked many participants in this regard) . I have heard others say you can't trade your narrative because as an amateur we have a tremendous information deficit and are likely to wrongly extrapolate, fill in the blanks. Also, trade context and timing must correlate for most of us with shallow pockets. there are some well known experts with a consensus context who haven't got paid yet.
Well, in the direction I intend to go in as a trader I plan to disregard any fundamentals and only build context technically. That is a decision based on the fact that I submit to the reality as a retail participant I DON'T know the fundamental factors. I can only build a hypotheses based on the balance of buyers/ sellers and nodes of price rejection/ acceptance. After that, of course, my hypothesis will not always play out. However, that is fine. The object of context is not so much to be right but to find sets ups where you can quickly know you are wrong paired with a long runway for potential profit. In other words, seeking out favorable risk/ reward trades. Under the strategy I am working on developing, wild card binary events like Brexit would be avoided unless risk/ reward could be defined ahead of time. As would things like the weekly oil inventory report and other news releases. Cute story.... I was long the VIX ahead of Brexit I used a short put spread so I had defined risk reward. Hey, the market had a rediculous bias for remain going in but the polls in reality were still uncertain......got a good deal on that spread.