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Edge?

  1. I often see posters refering to, or requiring an "edge" to make it as a trader. Sometimes you will find a qualification of an "edge" or a generalized conceptual idea of it, but never anything worth while. Since all traders have the opportunity to see the same data, the "edge" can not be in the input. Is it in the entrepretation? or the application? If someone consistently makes money, are they assumed to have an "edge"? I am coming to the conclusion that the "edge" is just application of any number of reasonable, disiplined actions that over time result in a profitable methodlolgy. You do not buy "edge" in a bottle or by the gram. So my hypothesis on this thread is that there is no "edge", just good trading principles, that may be quite varied. If I need further enlightenment on this, please provide it. I am sure all the "edgers" will correct my misguided ideas. :eek:
     
  2. Edge is simply taking advantage of the non-random nature of a market. They are quantifiable and persistent through time.

    A simple example of a edge in price data is "trend". Every market I've ever checked has a trending tendency beyond random. Some more than others. Incorporating that tendency would be to simply place trades in the direction of the trend.

    The best edges (largest degree of non-random behavior) are found external from price data, however. Something as simple as observing money flows into or out of mutual funds several days prior to price moves has been a exploitable edge for myself.

    Some people believe edge is nothing more than positive expectancy in a trading strategy. While this could be the case, you should satisfy yourself that the model captures persistent, and non-random opportunities. Otherwise the model will go under when the short-term "fitted" data reverts to it's more random nature.
     
  3. As far as price action data is concerned, you are correct, it is how the "output" is "viewed". However, price action edge is not the only edge one can have in trading.

    Yes, you can assume they have an edge, or number or edge(s) working for them, and they are both in the interpretation and the application.

    Very close, actually ... "application of any number of reasonable, disiplined actions that over time result in a profitable methodlolgy" is what you do when trading your edge.

    There most definitely are edge(s) in trading, and there are good trading principles, that may be quite varied. The two may be used together or seperate when trading, depending on what they mean to individual trader.

    Looks like we're off to a good start.

    Good trading,

    JJ
     
  4. Welcome back Acrary!

    In it's simplest form, it is a strategy that one can use to make consistent profits in the market.
     
  5. There's been many in-depth discussions about this in the past here at ET.

    http://www.elitetrader.com/vb/search.php?s=

    With that said, an edge can be anything and any trader that think it only involves only a pattern signal has probably not traded with real money on a consistent basis over many consecutive years.

    More importantly, if there's a routine or consistent approach to a profitable trader approach to the markets...

    I would say that trader has an edge and that routine or consistent approach is needed to maintain the consistent profits.

    Thus, any trader that approaches the markets in that there are other edges besides just the pattern signal is more likely to exploit the markets in comparison to someone that tries to find an edge only in a pattern signal.

    Simply, there's much more to technical analysis than the pattern signal...

    Something backtesters of technical analysis will always have problems in understanding because they mainly concentrate on the pattern signal and not the other aspects of technical analysis that goes beyond the pattern signal.

    Mark
     
  6. "Edge" is another of those vaguely defined words that traders use. In my opinion other examples of vaguely defined trading terms are trend, trend line, strength, weakness, up, down, quiet, top, bottom, looks toppy, pattern, chart pattern, triangle, flag, channel, and climax. I suspect attempts to define a standard speculative terminology fail. Anyone may appear at any time with their own trading terms and may or may not make sense.

    I define trading terms mathematically when I design a trading system.

    I suppose if I am winning then I have an edge at that moment. If I lose then I don't have an edge. Maybe the edge has me.

    <img src=http://images.usatoday.com/life/_photos/2006/02/02/edge-u2.jpg \img>

    The Edge.
     
  7. If you buy "edge", you may receive an additional 33% ROI.



    [​IMG]
     
  8. <img src="http://www.sff.net/people/doylemacdonald/edge.jpg">
     
  9. Get thee some testosterone.

    [​IMG]
     
  10. http://www.elitetrader.com/vb/showthread.php?s=&postid=1096266#post1096266
    Was gibt es Neues?
     
  11. What's your point jack-ass. His posts are always welcome.
     
  12. Acrary,

    Your presence here is like that of a gem in a wasteland. Thank you for returning to ET, looking forward to more superb contributions from you.
     
  13. "Trading with an edge is what separates th professionals from the amateurs. Ignore this and you will be eaten by those who don't" .

    An edge in trading is an exploitable statistical advantage based on market behavior that is likely to recur in the future.


    To find an edge, you need to locate entry points where there is a greater than normal probability that the market will move in a particular direction within your desired time frame. You then pair those entries with an exit strategy designed to profit from the type of moves for which the entry is designed. Simply put, to maximize your edge, entry strategies should be paired with exit strategies.
    ...WAY OF THE TURTLE...page 63
     
  14. Well said Mark ... not such a wasteland afterall, Maverick1.

    and when you add this:
    You pretty much have the philosophy of edge down pat.

    Now, you just have to focus on the details.

    Good trading,

    JJ
     
  15. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://bp1.blogger.com/_lPCxpA1k1LY/RxJV6TPYNGI/AAAAAAAAAAc/59HkEHhSGt8/s1600-h/edge+copy.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer;" src="http://bp1.blogger.com/_lPCxpA1k1LY/RxJV6TPYNGI/AAAAAAAAAAc/59HkEHhSGt8/s320/edge+copy.jpg" alt="" id="BLOGGER_PHOTO_ID_5121250186359223394" border="0" /></a>
    Through my experiences, my understanding of an 'edge' has been refined.

    In terms of hedge funds, or businesses, an edge is one fund's competitive advantage over its peers. This can manifest itself through experience, analytical capability, execution capability, technology platform, connections, and access to information. Holding all other variables constant, an increase of each of these will mean a manager has an edge over another. These manager/fund-specific qualitative factors are one of the primary reasons why hedge fund replication strategies do not work. Simply replicating exposures of a 'typical' hedge fund misses this point.

    In terms of a trading system, an edge is the system's ability to locate and generate trading signals based on nonrandom price behavior over market conditions. It is important to distinguish a system's behavior over market conditions (re: proper backtesting) and randomness because a random 'buying' strategy will appear to have an edge when the mean of the returns over the period is positive (bull market).

    In this context, 'money management and position sizing', 'positive expectancy' and 'discipline' are NOT sufficient to be an edge, though they may be assumed necessary. One of my biggest pet peeves is when people confuse these terms with what is necessary or sufficient to an edge.

    The reason that positive expectancy is not sufficient to be an edge is that again, in a bull market, a random buying strategy will tend to exhibit positive expectancy, as will a trading system with an 'edge'. At the same time, in choppy markets, a trend-following system with an edge may exhibit flat to negative expectancy. However, having positive expectancy over the aggregate market conditions is necessary.

    Discipline is not an edge in any form. If you don't have discipline you should not be putting money at risk; you are no better than a lazy gambler. It's as ridiculous as saying having an account at a broker is an edge for trading. Most retail traders struggle with this; this is why they are the amateurs at the bottom of the totem pole - risk, and quite often losses - gets transferred to these market participants.

    Money management/position sizing is necessary to maximize an edge, however it is not required as one form of backtesting involves trading 1-lots. In addition, normalized-risk trading systems incorporate position sizing/money management into their trading rule, so this could be thought of as a piece of the system itself. Therefore, position sizing is neither necessary nor sufficient for an edge.
     
  16. Interesting Thread...

    An Edge is Quantifiable through testing... Yes... and 'persistent through time' would also be true as a quality of an edge...

    BUT i think it would be important to try to decipher how potent that edge is now versus its use in the past... so

    Is the Edge fading / failing like many edges do (when others discover it and exploit it) - is the edge increasing or staying constant...
    <blockquote><b>
    If the Edge is 'new' in time and you can also discern a slight increase in its effectiveness then your position sizing could also be increased (rationally) along with it...

    If the Edge is 'mature' in time then your use of it and your position sizing could be deployed consistently with extra care taken to watch for outlier / exception events...

    If the Edge is 'old' in time (others have discovered it - market rules are dimming its effectiveness) then reducing onces position size could be an important consideration...

    If the Edge is 'fading / failing' then no position size may be best and monitoring from paper only may be prudent until it can be quantified that the edge has returned...
    </blockquote></b>
    As well as considering the idea of FADING the old edge as a new edge although that would need to be tested... too...

    Everything has a life cycle... especially in the markets where lifecycle's seem to peak faster than in other arenas...

    So where in the life cycle an edge is could be important to your long term P/L...


    <img src="http://www.enflow.com/p.gif">
     
  17. Tireg really nailed the salient facts regarding what constitutes an edge. It really surprises me to see how many traders and coaches/gurus don't even understand what an edge really is.... But that would explain the high rates of attrition in the industry... I would emphasize Tireg's comments that positive expectancy does NOT automatically mean that you have an edge.... there's a LOT more that goes into that determination.
    Fwiw, I would add that finding a true edge is difficult enough and exploiting it is perhaps as hard since it requires the rewiring of your brain's neural paths and an overhaul of your natural propensity for certainty and the sure thing bet.
     
  18. I have thought the exact same thing too...

    That, possibly, the need for certainty and 'the sure thing bet' is tied in with the dinosaur parts of our brain/mind that equate to direct survival...

    as in 'I Need To Know For Certain' that I will survive today... etc..

    So maybe the long learning curve almost all traders have is the 'actual' rewiring - re routing - rebuilding of new neural (new neurons) path ways to a higher or different area of the brain that allows successful traders to bypass the dino area that only responds with a flight or fight reaction... and instead pings an area of the mind that responds with a calm acceptance of a probability outcome... I may win... I may not... and that is ok... that is fine... in some this takes longer to build this path than in others... and to some it may be more painful to build than in others...

    all of this would be similar to the neural rewiring one has to go through after a stroke or a head injury... to build new neural paths... and the longer you trade the markets the more you will feel that you have had a few head injuries...


    <img src="http://www.enflow.com/p.gif">
     
  19. out legend has come back alive!

     
  20. And in the good condition.