Edge = [Your Rate of Return p.a.] - [Risk Free Return p.a.] You can only tell you had an edge in the past. Edge in the future can only be estimated with some probability range... Most markets have trends > noise (Hurst Exponent >0.5). It is highly possible that this characteristic will continue to exist in the future. Therefore we can say that trend-following methods probably will have an edge. We can also talk about the edge in the corporate world, which IMO is highly correlated with competition in the industry where the company operates. The stronger competition, the harder is to make profits --> same is true in financial markets. When you have kids, taxi drivers or housewifes as competitors... vide: 1999-2000 bubble.
Thats why off-floor trading is so much harder than floor trading. The floor traders wakes up everyday knowing his edge is intact until he reads in the paper that the regulators have opened up his market a la the Nasdaq. The off-floor trader has to perceive when conditions are right for his edge to work.
just wanted to throw this one in (though it might not be fully on topic): i once read an interview with larry rosenberg, who told that after he had been a floor trader for 30 years it took him several years to learn how to trade with a computer. i found this pretty amazing.
This is not about where you get your edge or what is someone's edge (method , market maker or floor trading) BUT about a mathematical method to relate a number with the word "edge"....
Here's the forerunner to my edge measurement method (which I've described many times). 1). Take all of the long trades and add up the total profits plus commissions and slippage for a year. 2). Pull out the same number of trades with the same holding period randomly from the year. Add the total profits made on the random trades. 3). Do the random test 1000 times. 4). Sort the random tests by total profits from lowest to highest. 5). Locate where your total profits were in relation to the 1000 tests. This is the ranking. The closer to the middle e.g. 500, the less the edge. Ideally the test will be above 700 or upper 30%. 6). Do the same test using short side trades. 7). Do the same test over multiple years. You'll get a statistic that shows how well the system is doing independent of whether the overall market was up or down. Here's a example for the daytrading continuation system that I posted in another thread. I didn't finish the system, so it only has trades for the long side. First here's the summary report from 1997 - present: