What is an edge?

Agreed . . . if these things are edges, then everything is an edge and that's not the case. The toilet paper I buy for my trading office is an off-brand and saves me money . . . is that an edge?

They may help you be more profitable, but that's not the true definition of an edge. An edge is rooted in statistical probability.

You can't make up your own definition just because it sounds good.

Keep trading.

JS

 

Great post. I would like to add that edges tend to "disappear" over time, as more and more traders know about them. For example, I have been arbing the same instrument(s) for the past 4+ years, and I noticed that it is now a lot more diificult to find arbing opportunities compared to 4 years ago, and when the opportunities do arise I have to be real quick to arb them away before somebody else does. I suppose I will have to look for another "edge" when it finally becomes too difficult to profit from trading this instrument...

Imo nothing you see or read on the internet is an edge, because nobody will ever give or even sell away a true edge when he can make a lot more money just by trading it.

 

Ah Frekin Men to this! Nice post!

 

Well last time i checked taking a shit is not a performance oriented activity. But if there was a competition for the cleanest ass using the least mount of toiler paper:

Using the right toilet paper is an edge.
Using more paper when your shits are bigger is an edge.
Using less paper when your shits are small is an edge.
Wiping in the right direction is an edge.
Finding the right toilet is an edge.
Being consistent in all these things is an edge.

Its a COMBINATION of things that make up an edge, for SOME traders. This is more in line with the discretionary trader.

Oh and that off brand paper you buy for your trading office, it gives your balance sheet an edge and allows you to keep more money in your pocket. I think that anything that helps you make more and keep more money is an edge as well.

Just wipe in the right direction.

 

My definition of “edge”:

After completing a statistically valid number of transactions chosen by a methodology, the gains of my successful transactions exceed the losses of my unsuccessful transactions.

If I cannot prove the above to myself then I have no reason for making any investment.

Joe.

 

You don't trade and never have is my guess.

 

pffff, this is a lame comment, (sorry, it's not a personal attack). why would being confident in a system be an edge? especially if it's losing money? dude, develop something, see that the results and logic/common sense are profitable, then have confidence, if one or two are absent, drop the confidence and go back to the drawing board.

for me an edge means: the capability to add value. imagine a shopping street with a full line up of similar stores competing with each other till the death. are you going there and open another similar store and expect to be profitable? are you adding value to the consumer by another similar store in the same street? no. opening a similar store in a oversupplied location is not an edge.

 

You know me too well. But you right its just a guess.

 

It might be nice to construct a tree which branches out at various decision points. If monks did it it would be very illumminating.

You've seen my recitations on good reads that show the humor of the CW. Some in that venue think they are rational, logical and systematic.

You have to admit, though, that they would not turn down the path labelled deduction. Why did they always take the inductive fork and do "claiming" of rational, logical and systematic? I see you calling TZ those words and yet he isn't. He is a CW type guy.

Each of the many branches that occur after strolling away on deduction path from the induction/deduction fork contain most of what is termed here (mathematically speaking) edges.

The first branch I came to was periodicity. This characteristic simply sets up the "loop" aspect of trading.

Another close by branch was the deduction of how money is made in markets: price change. This deduction is very fruitful for edges.

After that I found that the operating point of the market migrated instead of jumped around on various multidimensional matrices. From a quant point of view the various levels of market strength (as defined in funny maths) confirm this when induction is disregarded. (See strong form of EMH on page 207 of Fox).

Twin modes of ES market pace vs volatility (i.e, Y = 8E-05x +2.3741 with R^2 = 0.472) show how the boat is rocked from one gunnel to the other.

By deducing a market paradigm, a person gains in knowing the market's measure and the relationship of the market's variables. This branch is where most of the low hanging fruit comes from.

On page 70 of "Musicophelia" (Oliver Sacks) a quote begins "My brain makes up patterns......" This is a deductive reference backed up by Tufte in EI and TVDQI on the information contained in illustrations. By learning deduction and NLP's function in a paticular type of mind, edges appear in many forms. The particular mind type is the informed and differentiated mind. The mind can be differentiated by doing methodical drills that relate to logic in information display of markets.

Information display is not inductive. The most informative deductive examples involve parts of "loops" where, mathematically, additional degrees of freedom are added and the cases of integrated parts show the orderly migration of the operating point of the market. As anyone discovers from reading the history of mathematical deduction in the financial industry, these sets of cases came first in market analysis history. (Search convergence and divergence). The edge discoveries come in finding what comes between the two items mentioned. (there are six reliable cases).

Pictorially, geometry is the most powerful deductive simple math for illustrations. Knowing that fractal sentiment overlaps is a very strong deductive advantage. Knowing that the overlap is expressed in each market variable is even more advantageous.
Knowing which variable precedes the other is advantageous as well. All of this comes from deduction and not induction.

How does a person come to the point of not predicting because it is trivial (mathematically speaking)? Through deduction.

What is the determinant for knowing that probability is not required for trading successfully? This is a logical deduction. (See Bayes and Carnap and Keynes)

None of the above details out an edge a person can jump right on and use to make money. The above are all just branches that have zillions of edges that I would call twigs growing out of the deductive branches.

Here is an interesting beginner twig. If you recognize that trends ovrlap and you know about how periodicity causes loops, why not just trade using reversals at the same point in each trend. Here are two possible points to consider: RTL BO's or FTT's before RTL BO's. Why not just trade dominant traverses of channels? The three corresponding volume signals for these three patterns are: R2R's and B2B's at troughs; R2B or B2R's on peaks: and R2B's or B2R's on troughs. Of course all three can be combined and while using reversal trades throughout.

For these there are no DD's and the sharpe is very high since there is no "net" aspect. What is the expectancy by staying on the right side of the market all of the time that these combined trades would yield? LOL.....

The branches along the deductive path all provide twigs that eliminate dealing with DD and having to sideline during RMH's.

So, its time to prove the above. Proving induction is done with Excel spread sheets. What proves deductive processes? It may be that the mind can be tested. Try a read of "Mindfulness in Plain English" by V. H. Gunaratana.