Murray It's interesting how some want the fast route, gimme the edge now mentality. Makes me think of those who start playing guitar for example, and want to be Van Halen after the 2nd guitar lesson after learnings how to hold down an open E chord, lol. Or the jazz player who wants to learn how to play out without knowing what playing in really is... I just disagree with the fundamental approach many take on defining 'edge'. To me understanding transcends edge. Edge is important of course, but only finds its proper meaning within the context of real understanding of market microstructure, that is how the market breathes, acts, lives. Anything short of that will disappear in due time as the next guy figures the 'trick' out. But the trader who is grounded in the cycle of the market and understanding of trend/anti trend need not worry that others have better information than him or information before him. He doesn't care frankly, as long as he knows where he is in the context of the story. My 2c.
I will have to disagree, at least partially. Sure, it's true if you have a good cost/capital structure you can do a lot of the same trades (M&A, some convertible arbs, etc.) but for what, a couple bucks? Who cares if you can put on the trade because you will be hedged by the 2 lot offer, the big guy is making 1000x what you are. If one has the knowledge and commitment to trade full time, they shouldn't settle for $50k a year or whatever the leftovers amount to. Get a good prop deal and trade size if you have an edge, otherwise you're just piking around.
I wasn't referring to mimicking the same types of trades as large institutions, there are plenty of markets and trading styles that do not lend themselves to being scaled up that an individual can still execute and make a very decent living. For example, very short-term scalping of currency futures would get cumbersome once you go beyond a handful of contracts on the less liquid markets-- that kind of trader doesn't need to resort to added leverage from prop (it wouldn't help much anyways) but he could still put up impressive numbers.
Where is the edge in "very short-term scalping of currency futures"? I just don't buy it, who cares if you're trading a handful of contracts
Well, you may as well ask where is the edge in trading anything if you want an explicit answer to that, but successful scalpers exist in all other markets so why not currencies. Granted, the liquidity center for forex is not on globex, but the arbs maintain more than enough liquidity/tightness of spreads for the smaller trader on the majors. At the shortest time-frames I'm assuming tape reading skills would be the overarching souce of edge, though that's just one dimension to it. The point I'm making is that scalping is particularly suited for individuals trading smaller size, the smaller your trading size the more options open up in terms of "exploitable" setups in this time frame. And yes, I believe a good scalper can make a decent six-figure income trading "a handful" of futures contracts; he is limited to "income" as opposed to a compounding return profile, but it's income nevertheless.
To know if you have an edge you gotta quantify your results relative to random outcomes... if your trading results are consistently more profitable than random outcomes, you have an edge...
For me having an edge and being able to make money is the same thing. So the question is how does one make money in the market and why? I think the only way to make money is to take it from someone that is making a mistake. Your job is to find that mistake and use it to your advantage. Keep in mind that people rarely make mistakes and are trying to correct them - no one likes to be a loser. Like in sports, you can't beat your opponent if they don't make a mistake and you have to be ready and take your shot when he gives you the opportunity. Think tennis, boxing, poker, etc. In the market people make many mistakes that you can successfully exploit until they realize it and correct their position, which they always do. People have weaknesses and the few smart guys that can see them and have the discipline and courage can profit from them. For example people don't like boring businesses (like garbage collecting, funeral services or fertilizer manufacturers) even though they might be excellent companies with outstanding management (because people like to brag and such companies are not ones you would brag about); people don't like companies that the large brokers don't recommend (yet), they prefer to buy them when they hear about them on CNBC or read a story about them in the Journal and meanwhile those companies are up a couple of hundred percent; for some strange reason people prefer to believe in the exception than in the rules, that's why they prefer to believe that companies will not be able to sustain a high growth trajectory and they fail to buy these companies which many times have some sort of built in advantage that will not cease to exist only because people believe so; trends will continue to exist because people are slow to notice, realize and internalize change, because they feel regret that they missed the train and that is why riding trends will continue to be profitable for those that can spot them; conservative people don't buy fashion stocks because they hate fashion and thus fail to buy young and hot companies which can advance thousands or percent, they prefer income stocks that yield 10% a year; people make mistakes in the small time frames too - they are slow to react, slow to notice, lazy to exploit opportunities they see, for example the discrepancy between his brokers quotes and Island that hoodooman has noticed and was diligent to exploit - why did nobody else take advantage of this money machine at the time it existed (did someone care to check if it still exists)? In the past you could have profited simply from having faster quotes or better communication or better pricing models (in options). I can't give many other examples of short term profitable strategies because I am not a very short-term trader myself, but I can pretty well interpret technical and fundamental information (only for specific companies, not macro data), and this is I guess my edge, because I think it is pretty difficult to master - it takes years of reading and practicing and that is why I can do it better than the next guy who just starts trading/investing and his head is full of misconceptions, like the significance of the latest news and economic numbers or stuff like that, or the all powerful indicators or the prophecies of market gurus. In a word, I see the edge as an ability to make money which comes from devoting time and energy to study, observe, apply common sense and have the character to put your ideas and beliefs in practice.