Do most traders even have an edge?

Discussion in 'Psychology' started by empee, Nov 28, 2007.

  1. empee


    Whether you refer to chart patterns, etc. Lets take Head & Shoulders, Double-Bottom, whatever. People attribute their success to these patterns or whatever edge they believe they have. When in reality, buying and selling randomly should produce positive expectancy (since the market has a positive bias), and really the edge likes in risk/reward. Ie ppl are trading with 3:1 or better odds.

    I guess the question is I would like to have ppl who believe they have an edge to place trades randomly (on paper) side-by-side with their actual trading (with similar risk/reward profiles). I wonder if there would be a statistical difference over time?

    It seems to be that the real edge is the risk reward, and ppl attribute the success to other things.

    I say this because ppl are always referring to money management, etc. If you had an edge wouldn't money management not be as important? (I agree you have to handle string of losers, etc) but with good risk reward and low risk per positions, I think random entry/exit would perform (ie the random times could be determined ahead of time to make sure they are random or by rolling a die to determine exit day/hour etc).

    The more I read the more I'm convinced ppl are attributing their success to the wrong thing. It may just be random (their edge, no edge at all) and they are benefiting from the market bias (would I guess could be an edge) and good risk reward.

    We see this when ppl can recall when the pattern works and therefore confirm this belief. But testing by many ppl shows MANY patterns have no valid edge. (not all).

    I find it interesting that after its all said and done its really random entry/exit that is happening; I could even argue because well known patterns are "known" they actual HURT performance -- random entry/exit would be better.

    I will post some research demonstrating this shortly.

  2. Without an edge comms and slippage kill you. If you enter randomly with 3:1 risk reward you'll have 3 losers for every 1 winner, and be out slippage + commissions.
  3. i think doing that will not be any fun at all... trading randomly ... hm :)
  4. edge is pure illusion.

    an edge can be anything at all, an indicator, trust in your capacities, using a 4.5 minute chart to ''frontrun'' the 5 minutes charts, being able to count up to 10, those are all valid edges

    most people will need what they call an ''edge'' to convince themselves they are beeter than the majority because they have an edge.
  5. Hah... too funny. You're either kidding or just plain ignorant. Let's assume the latter.

    a) An edge is a statistically significant entry and exit plan that produces profit over time. If you have an entry that is 60% right with greater than 1-1 risk to reward then you have an edge.

    b) An indicator is not an edge nor is anything you mentioned. Trust in you capacities means different things to different people.... some traders can buy panic and sell greed - they have a psychological edge. Generally, "anything" cannot be an edge... what a foolish statement to say such. Charts do not provide edge.

    c) An edge can be quantified by exploiting two market characteristics - Directional days and Rangebound days. Simply identifying the two behaviors can produce an edge...

    d) If you don't know what your edge is be it statistical or psychological, then you are a losing trader. Period.

    e) Stop with the "random entry" garbage. Markets are not random. Markets display repeated behavior patterns - people make the same mistakes over and over again. That's why markets are not random - people are not rational. If you really think that markets are random then WTF are you doing on this site anyway?

    Enough. This topic has been beaten to death by some very experienced and profitable traders. Do a search.

    Oh, and the answer is no - most traders do not have an edge. If the majority did then we would have a non-volatile efficient market (i.e. an academic illusion).

    Wingz likes this.
  6. Excellent :cool:

  7. plugger


    All I can say is that cutting my losses short has saved my ass countless times.
  8. dtan1e


    i suspect most doesn't have an edge, come to think of it, i wonder if i have an edge after all this years
  9. i dont think i have one

    i am a complete and totally discretionary old time scalper

    keeping it simple watching the es and paying attention

    its funny how its still working cause i didnt think it would
  10. empee


    I strongly disagree with virtually everything you've written here.

    A) "Statistically Signficant" -- how do you quantify that. Do you have a sample size of N? I do considerable backtesting, Monte Carlo, and probably the hardest question to answer is -- IS IT STATISTICALLY SIGNIFICANT. To say that as a being a "given" is obtuse viewpoint at best. How many ppl who backtest have seen a system work great and then when say the test period changes it fails miserably?

    b) Wrong and wrong. How can you say charts do not definitively provide an edge? As Taleb says (Black Swan) one instance disproves what you're saying. Until you can disprove say, head and shoulders don't work (I don't think they do) but there may be traders who can statistically show they do, you can't make blanket statements like that. I've seen ppl/trading with violation of every trading rule that have historically made money (not saying that it was STATISTICALLY SIGNIFICANT). There many be edges that you have or haven't thought of, once again to say "anything" can't be an edge is not true. Just because YOU haven't figured out an EDGE someone else has, doesn't mean it doesn't exist.

    c) This is a good example of your whole post, obviously you have a market view/bias and anything that doesn't pertain to YOUR view is invalid. I don't agree that is "ALL" there is.

    d) I would agree, that you have to at least know theoretically what your edge is.

    e) This is probably the most RETARDED statement ever. First, I posted random entry exit, that doesn't not MEAN the markets are RANDOM. As I stated, for example, that the longer-term trend is up so clearly there is a upward bias (as far as we have seen, perhaps it ends i a crash and 0 which would nullify that statement). The casuality you attach (markets aren't random because people aren't rational) I said neither.

    This REPLY was excellent in many ways. First, it gives a FANTASTIC example of the close minded mentality of many traders. "Its my way or the highway"; I need to affirm everything I believe because anything that invalids my beliefs means my "edge" may not be the "edge" I thought it is (For example).

    The purpose here is truth, instead of trading dogma. We are looking with an open mind to what really is going on. In my afore mentioned post I make the case that RANDOM entry/exit leads to often BETTER results than "pattern" entry/exit/stops.

    For example, lets say I have an edge that violates one of the beliefs you use to create your "edge" - even tho it may work. Most ppl don't want to reveal their edge just to prove to anonymous posters that, in fact, that they can disprove some posters statement.

    My point is that I believe most traders make money on the risk reward/money management and may even have NEGATIVE returns with classic T/A. (Ie random entry/exit exceeds certain T/A based "edges"). This does NOT connote that I believe or I am trying to communicate markets are RANDOM. There is a difference.

    I'm travelling so I'll post some data. The point of this thread is to keep an OPEN mind and challenge COMMON BELIEFS of traders. This means we have to agree to have ALL our views challenged -- if they are "statistically valid" than they should hold up.
    #10     Nov 28, 2007