This "edge" stuff

3 arrows are stronger than 1.

 

Yes.. my friends, that is the secret. All you have to do is buy when the arrows turn green and sell when they turn red! It's that simple!


Oh dear. I just gave away the edge.


But in all seriousness, dictionary.com defines edge:

5. A margin of superiority; an advantage: a slight edge over the opposition.

I liked the examples someone gave earlier about having the fastest order execution or having the most capital.. those were great examples of an edge.

What one has to address I think is what gives you the advantage or margin of superiority over the market?

Effective analysis certainly plays a role.. so does discipline.. risk management.. all of these things contribute toward your margin of superiority; IE by having these aspects you'll perform better than someone who doesn't. Thus you have an edge over them.

 

Then theres this one I have told before after hearing Van Tharp say it. --- Van Tharp asked a room full of seminar attendees. What is your best risk reward idea. Buy microsoft etc.

Then one guy said. Open a donut shop next to a police station.

 

Based on Jem’s donut example — ‘location, location, location’ = trade entry, and converesly, recognising one's in the wrong location, vacating/exiting the location/trade asap, together provide an edge.

I kinda feel ‘edge’ is a bit of trading jargon since posts have described several ‘edges’, each different tho all contributing to successful trading, doesn’t ‘edge’ just mean profitability ?

 

"It isn't as important to buy as cheap as possible as it is to buy at the right time." Jesse Livermore

 

Since NTB was so generous with his examples, I thought I should add a few.

Edges also come from other people not doing their job

eg

1) mutual funds not bothering to squeeze out the last penny in a merger situation, leaving it to the arbs, leaving behind a profitable business. Once they start to bother, the business shrinks.

2) indexers blindly buying/selling components on add/deletes, leaving a profitable business to frontrunners. Once they start to bother the business shrinks.

3) options purchasers/sellers not bothering to see if the option is fairly priced relative to others in the chain, leaving a profitable business to volatility arbs. Once they start to bother, the business shrinks.

... dislocations, sloppiness, structural rigidities, lack of information are all good places to find edges.

Can technical analysis be considered an edge .... goodness. Never say never I guess. After all trendfollowing is a form of technical analysis that certainly used to work very well.

 

Yes the market's short-term inefficiencies provide opportunities. As you say, I think these opportunities for arb will become smaller and harder to find as information becomes more widespread and easily available and many things become automated/computerized.

 

Anybody who really knows trading knows what an 'edge' is...but in case you don't, NTB just spelled it out here. Well put.

 

for example:

a system that can be utilized to provide 51 winners and 49 losers for every 100 games of craps, blackjack or whatever gives you an edge. once you have the edge, all you do is play as many games as possible that fall w/in the parameters of the system.

 

lot of thanks around the horn for some good discussion. Agree that NTB has provided some nice food for thought-style examples.