I define ‘edge’ as a positive expected value, after commissions. I think that different people define ‘edge’ in different ways, but we are (mostly) all roughly describing the same concept. More precisely, I define edge as an expected value, after commissions, that exceeds the risk-free rate, but since I only trade strategies that significantly exceed the risk-free rate, we can drop that complication. Moreover, it takes a lot of data to shrink the confidence interval on the point estimate of the expected value (depending on the strategy). Having an edge is an insufficient criterion for trading a strategy because it leaves out the whole question of risk. To assess risk, I look at the distribution of profits and losses (mark-to-market, not just realized). I also conduct simulations, bootstrapping, etc. That is another topic. Focusing just on edge, for me your question translates into: “How do you find strategies that result in positive expected value?” Simply put, I do things that the majority of market participants are unwilling or unable to do. I find these opportunities by thinking (sometimes literally sitting back in a recliner with a coffee) about the different types of market participants, their varying objectives, constraints, etc. I also read a lot. The reason I crafted trading into a career is because I love to think, I love to read, I love math, statistics, programming and finance. I also love independence. This work allows me to be free to think as hard as I can and read as much as I want with complete freedom to decide when and what. For me, that's the perfect life. Once I have a theory about the markets that makes sense, I test it. I try not to test too many ideas without considering them carefully first, because even with proper statistics, occasionally I’ll get something that looks good purely due to chance. This is just the nature of the world and everyone is subject to it. That said, if 9/10 strategies are based on a real signal, for example, and 1/10 are not, it’s not the end of the world… but I would like to minimize the number of strategies that appear good but are actually based on noise as much as possible. Note that I am not satisfied that I’ve found an edge just because I’ve back-tested a strategy and found a positive expected value. The first step is to verify that the edge is statistically significant (simple), but even that is insufficient. I also want to see how well the distribution I have may reflect the potential future distribution of profits and losses… this takes much more work. I do this by performing simulations, looking at covariates, analyzing robustness, etc. In other words, I may have discovered an edge in my sample, but that in and of itself is not enough for me to conclude that I have an edge in the population. I also work hard to always ask myself if the work I'm doing in the moment is the work that is most likely to be the most fruitful, or not. It’s very tempting (for me at least) to do work that has the mere potential to be fruitful, but that is really just the most interesting, exciting, intellectually stimulating, etc. I try, the best I can, to cut that out and focus on work that has the highest probability of being useful. Recently, that includes hiring out very important but mind-numbing tasks (eg data cleaning) that I can verify were correctly done after the fact with much less effort than it would have taken me to do them myself in the first place. This is a rough description of my framework. I hope there's something useful there for you.
I’m new, and still trying to figure the trading game out. No edge. I don’t even think I know what an edge is yet. But what I do know, is this is probably the most refreshing post I’ve ever seen on any forum I’ve ever been on . Thanks for being honest. one of the things I’m still trying to figure out is who on this forum is real and who is full of shit (not intentionally of course LOL)
If you are new to the trading game I would advice you seriously to re-consider if you want to do this. At least short term trading. The high failure rate figures often quoted I imagine are very real. And these are smart people, so don't think you'll be the exception (I did). Trading is unlike any other thing you'll ever try. Unless you're lucky to have a profitable mentor (very rare, I think) you're basically alone. And that means a lot of stumbling around in the dark with trial and error and long hours in front of the screen. Or worse: you end up receiving guidance from someone who's not profitable and will be led astray learning the wrong concepts or ideas. 10 years to become consistently profitable seems like a reasonable timeline. For some probably more. For some - they'll never become profitable anyway. I may be one of those. We'll see. I was probably a bit harsh on myself the last time here. I've made money the last 7 days in a row and had a good read on the market being both long and short. Yet, today, I actually got into trouble and got chopped up a bit on the Open as I got overconfident and took on a bit too much size. The day is still young, so I may be able to salvage it (currently long ES from 4386), but right now I'm in the red for the day. Day trading still feels very much like this. If you're not on top of your game and/or very disciplined, it's very easy to lose your balance and fall into the abyss.
Thanks LF, I appreciate the input. I should probably provide some context….. I’m not looking to do this for a living. I’m a retired Financial Advisor/CFP. But I pretty much did Financial Planning and Asset Allocation using Index ETFs. I didn’t generally trade for clients and didn’t have time to do it much for myself. When I did, it was without a process. Now that I’m retired, it’s a way for me to stay engaged, keep my mind sharp. So I’m looking to learn I’ve read O’Neils book, How to Make Money in Stocks, and rereading it now. Also read Mark Minervini’s book, Think and Trade Like a Champion. And I’ve read Brian Shannon’s book “Technical Analysis Using Multiple Time Frames”, Which I intend to read again, it was excellent. I knew the basics coming in, the reading helped me learn more, Now I’m looking to get more micro, and try to develop my own strategy. I probably should have started a separate thread, didn’t mean to hijack. Anyway, thanks again for the input and thoughtful response.
Got it. I've heard good things about the two first books, but I don't know anything about the latter. Books introduce much of the same problems as you often don't know if they're merely authors (usually the case) or profitable traders teaching a profitable method, so only trust what you learn if you can verify it yourself. It's generally only a problem if you blindly trust someone. Final word of advice if/when you do go live with real money: Stay small. If there's one regret I have it's that I've traded far too large while learning. In addition to the monetary losses I believe it can enforce wrong habits and ideas about the market. When you're trading small you should be very relaxed and calm about what's going on without ever taking any one loss too hard or any one win too exciting. But as soon as you're trading big - those numbers flashing on the screen in front of you take on a different meaning altogether and you will experience brainfreeze, cutting your winners short and often holding losses for too long. The beautiful thing about the market is that if you do have an edge you can trade small and grow bigger as long as you're patient and take your time. Adding size only as your account and confidence grows. This have been and still is in some way a sticking point of mine, but I'm trying to just stay with the process now.
Thanks LF, great advice again. William O’Neill book is very well-known and respected as a must read especially for a new traders. Mike Minervini is a well-known and profitable trader , Although little bit more of a self promoter than I’d like. And the last book is written by Brian Shannon who I know is a professional trader I follow him on Twitter and I have interacted with him a bit. FinTwit is a great resource when I first got the idea to trade, I was trading pretty big size, looking to grab half a point to a point and get out. It worked out well the first month but then January came and I learned LOL My plan when I’m ready is to allocate 5% of my total capital to trading and probably not put more than 10-15% of that amount into anyone position
Sounds good. Maybe I'll check out those books. Mike Minervini did make an impression upon me reading about him in Market Wizards. O'Neill is a classic. The one thing you can't escape regardless of method is expectancy. If you're looking only to grab half a point - what's your risk? I assume it's a great deal more than half a point. If so, that method will only work if you have a VERY high win rate as eventually you'll take that large stop which eradicates all your small winners and then some. Considering that, it may be more attractive to consider setting up a method where your R:R is at least 2:1 such that you can get ahead with a win rate less than 50 %. Some examples here: Sekiyo's 50K TopStep Combine
A trading edge is basically your strength. It’s anything that helps you accumulate more profits than losses and I think the best way to know your edge is by educating yourself because this is how you unleash your hidden potential. In addition, track your performance in your trading journal as it will give you insights about what’s working for you and what’s not.
Learning to read a chart and understanding ta. It's important to have a set of rules and stick to them. Lastly, back test. If you find something that works, stick to it...