what's the common approach to develop an edge(if there is any)?

Discussion in 'Strategy Development' started by traderzhangSan, Jul 14, 2010.

  1. for example, I look at charts, and found and back tested, if price move up and down too much , statistically speaking, there is high prob. of pull back. this is my edge. however there is not much such trading opportunity, maybe only once a week.

    some people do trend following, some trade on breaks , those are common strategies.when too many people do those kind of strategies, it will not make money easily.

    any other type of strategies that are not so obvious?
  2. Screen-time (5,000 hours, minimum) and forward testing.

    Journal the evolution of your strategies so 2 years from now, when you come back to an old idea already trashed, you won't chase your tail.

    Trading esoterica is more the dominion of math geeks adept at programming. If that's not you, forget about it.

    The popularity of a *general* approach has little bearing on it's effectiveness. The markets trend and range. That's all they ever do. Nearly everyone knows it. Yet, the markets continue to trend and range.
  3. I don't buy "screen time 5000 hours minimum".

    many institutional traders don't ahve that mnay screen time, yet they are profitable.

  4. Aetey


    In my definition an edge, if there is such a thing, is the combination of a lot of things: entry setups, profit targets, protective stops, trading opportunities and position sizing. Most importantly, you need a sound trading psychology.

    Don't make the mistake to suppose that once you found a high reliability entry setup you're guaranteed to make money. An entry setup, like the one you described, is just that - the entry into a trade. The part which makes money is the profit taking exit, with all the aforementionned concepts in between.

    You really need a complete (and tested) trading system, otherwise you're going to get fried.
  5. You're a 5-month rookie who knows shit about shit.

    Most institutional traders can't beat the S&P.

    Those who are profitable inherit or enjoy access to proprietary information you'll never see in your life.

    Cracking the market in a year is practically unheard of. 5 years is normal. Most never get it. To suggest you can do it in a few months...the ignorance is baffling. GOOD LUCK.
  6. If you're asking how to develop an edge, you don't get to buy anything or not.

    "Institutional traders", as the term is generally used here, have a structural edge, and their job is to realize/monetize it. You, as the retail guy sitting near the bottom of the food chain, have a much different problem to solve.

    To be honest, you'll be lucky to figure it out in 5000 hours. Some do, of course.
    Ghost_of_Blotto likes this.
  7. ammo


  8. Here's your edge, time and money. If you don't have enough of either, you won't be around long enough to learn what methods and instruments suit your eye and emotional profile. The edge is being able to trade your game and not everyone else's. Takes awhile to master that.
  9. cokezero


    I've found that thinking is more effective than observing. When you look at a chart the human mind is wired to find patterns that are not actually there. Also, what works is what you can't see with your eyes but instead have to see with your mind. When I say thinking I mean making an assumption based on my believe of how the market works and test it to see if there is any validity. When I run out of ideas I read. I've found that reading, no matter how useless the materials are, is a good trigger for new ideas. I've built a library consists of totally useless trading books but I still flip thru them once in a while just to get some stimulation for my mind. I also visit websites like ET for stimulation.

    Whenever I think of an idea I write it down on my notebook. I've been able to generate a lot of ideas because I'm constantly thinking about the market. Ideas could come anytime and I make sure I write them down everytime so that I won't miss any. When I don't have my notebook with me I type it up on my PDA and later copy it to my notebook. With an abundant backlog of ideas I was able to consistently test about 3 to 4 ideas a day 5 to 6 days a week for the last 5 years. That amounts to about 5000 different ideas. In the beginning I test just about anything I could think of no matter how outrageous it might be and the quality of the test is bad and most of the time spent is pure waste. Overtime I've developed a toolbox of valid assumptions about the market and is able to narrow down the direction of tests and the quality of the test goes up drammatically. The quality of the test follows an exponential curve with completely crappy results for a very long time in the beginning. The best ideas are always my latest ideas as my experince grow.

    Experiencing failure thousands of times is no fun and is very discouraging. To drag my ass back to testing and experiencing yet another failure is no easy task. I've found that thinking thru the idea throughoughly and run "simulations" in my mind before the actualy test helps a great deal. For one it would eliminate many ideas not worth testing on second thought and also thru the process it helps to generate even more ideas. More importantly with the mind simulation I was able to convince myself that the idea is a good one and would give me hope and get myself excited enough to get back to the computer and work. Of course most ideas would again proved to be useless. Sometimes it gets to a point that when I think of a good idea I don't dare to test it. I want to hang on to this "good idea" for a couple days so that I can feel better with some hope. I'm afraid once I test the idea it would turn out to be not so good afterall (99% of the time) and so goes the hope with it. Over time I've learned to just treat it as a job and test 3-4 ideas a day like a robot. I no longer hope or get excited or anything. I just test like a robot and goes next next next. It sped up my testing because the hope-excited-defeated cycle is a drag both emotionally and time wise. When I see valid results it goes to my toolbox for further development.

    I think the process to develop an edge more or less follows this path. I might be just dumb and I think it could be possible to find something that is useful with maybe a few hundred ideas and do it in maybe a year or two. I would recommend against automatic pattern search and the like. The market is all about the assumptions you make and how close your assumptions are to reality. ATS wouldn't help you bulid a valid assumption and is probably counter productive in that regard. I think there is no substitute for manual research and most importantly lots and lots of thinking and seeing things with your mind.

    Good luck!
  10. I hope you realize that any commonly known strategy (e.g. trend following, breakouts) have hundreds of variations for each commonly known strategy. Further, with those hundreds of variations being applied to different trading instruments, different time frames at different times of the trading day along with traders using different trade execution platforms and charting software...

    The edge will not be lost (if there's an edge) unless it's a automated mechanical system. Thus, if you're not using an automated mechanical system and your edge is within one of those variation of a commonly known strategy...don't worry if your edge will be lost if someone finds out about it. :cool:

    Strongly agree.

    #10     Jul 14, 2010