Where's The Edge?

The secret to edge is right here.

Trading is simple...Don't overcomplicate things
#1 Trade with trend
#2 Buy low / sell high
#3 Don't be scared but don't be greedy

Pattern recognition.
The human brain is WAY awesome.
Much more awesome and strange then any live human could tell you.
That means you need to have a hunch.
And its so complex a synthesis made of so many parts, effects and elements that you cant say what it is.

I have an analogy.
From Muay Thai, but it works with pretty much any sport or trading...
Someone asked Lerdsila, one of the greatest, what his strategy is, what his style is.
He answered in bad english "Sneaky style" and he just went back to practice.
Obviously the dude asking was looking for a fancy, long description or a conversation.
But thats just not happening.
Because its not something that you can EXPLAIN fully.
Only to a small degree can you put it into words.
And its the same with technical analysis.
Its so complicated and depends on so many factors, you dont even know yourself why or how it works.
You can only guess and you can only give a bad explanation that doesnt do much for anyone.

I think the edge is yourself. and nobody will tell you their edge, even George Soros. If someone say he/she is better than him, then good for them. cant wait to see his name on the Forbes list.

So if somebody tell you their fxk holy grail, either he is insane or trying to get something from you or really a god-like person ( who is minority but thank you you are our hero). Or last, they think that is holy grail at some extent.

Renko charts all the way!

A classic example of a true edge is the green 0 or 00 in roulette. There are as many red numbers as there are black number in roulette, 18 of each. If you bet $1 on red and you're right, you get $1. If it doesn't land on red, you lose $1. If there were only red and black numbers, you'd win half the time (and take a dollar from the house) and lose half the time (giving a dollar to the house), so the expected return is zero. But because of those pesky zeros, the house has an edge. There are 18 reds, 18 blacks, and 1 zero (or 2 zeros in American roulette). There is slightly less than 50% probability of getting a red: 18/(18 + 18 + 1) = 48.6%. The house has a probability of winning that is: (18 + 1)/(18 + 18 + 1) = 51.4%

I basically define having an edge as having a positive expected return. I know that this is basically just a fancy way of saying that having an edge is being profitable, but yes, that's how I see it. If you are profitable you have a positive expected return, and if you have a positive expected return, you have an edge. Conversely, if you have an edge, you will have a positive expected return, and then you will be profitable. But let's look at the expected return in detail:

1) E(X) = P(W)*W - P(L)*L + P(BE)*0
2) E(X) = P(W)*W - P(L)*L

Where…
X is our random variable of returns
W = average size of a win; P(W) = probability of a win
L = average size of a loss; P(L) = probability of a loss
P(BE) = probability of a break-even. Of course the size of a break-even return is 0.

1) and 2) are equivalent because of the zero (break-even trades provide no profit or loss).

So if you have an edge, then this must be positive:

E(X) = P(W)*W - P(L)*L > 0
P(W)*W - P(L)*L > 0
P(W)*W > P(L)*L

I realize that this is just a fancy way of saying that your wins outweigh your losses, but that — to me — is exactly how you know you have an edge. Then looking at the formula, you can can that the edge lies in one of the 4 elements, or a combination thereof:

P(W)*W > P(L)*L

How would the win side be greater than the loss side?

P(W): high probability of winning
W: large wins
P(L): low probability of losing
L: small losses

… or of course it could be a combination of these factors. But what is it that makes your edge, where is your "green zero" (like roulette)? There are different reasons for different situations.

For the house in roulette:
P(W)*W > P(L)*L
(0.514)*1 > (0.486)*1

What makes the left side greater than the right? It's not the size of the wins/losses, since they're both 1. It's the slightly greater probability of winning (and lower probability of losing) that gives the house the edge.

For a trading example, if your expected return is positive (meaning your wins outweigh your losses) not because of many wins, but because when you do have wins, they're huge wins that outweigh all your many losses, then your edge is in your ability to catch large moves and ride them a long distance, essentially, your ability to let your profits run. Whatever it is you're doing that helps you do that is your edge in this strategy. If it's some indicator that helps you ride the trend, then that indicator is giving you an edge.

If you have another strategy where your wins outweigh your losses because you have a very low number of losses (probability of loss is low), and a high number of wins (probability of win is high), then it is the accuracy of your signal/setup/entry that is giving you an edge.

Maybe you don't have a high probability of winning, but your probability of losing is low, and your probability of break-even is high. Depending on the details, that could work: If P(W) = 5%, P(L) = 7%, P(BE) = 88%, W = 10 pips, L = 5 pips, then…

P(W)*W > P(L)*L
0.05*10 > 0.07*5 = 0.15,

… which is positive, so it's profitable and there's an edge. In this case, the wins are only 5% of the time, and the losses are 7%; you lose more often than you win! The wins are bigger than the losses, but it's just a 2:1 ratio. This strategy might have some money/risk management technique that allows you to get break-even many times (88%) instead of a loss. Clearly your money management is key to your edge.

So there are different ways to gain an edge.

I agree with the conclusion above, if you are winning at the game called "trading" - that is your edge, regardless of which way you doing it.

Edge is anything that gives you an advantage to extract profits from the markets.

Whereas there may be a process to finding that "advantage", the process itself will be limited to your knowledge and skills. Unfortunately, most will never find an edge but will likely borrow one.

The simplest places (in no particular order and by no means an exhaustive list) where you can start looking for an "advantage" is:
- Orders - where are the orders? where are the stops? Market moves based on these orders
- Psychology - e.g. Shooting star candlestick accumulates sell orders but price continues higher
- Trade management - for example, most traders enter one position at a time. Could you enter 10 positions and manage them simultaneously? That would be an advantage.
- Arbitrage opportunities - speed over other traders
- Exploiting inefficiencies - for example, behavioural biases - trend, mean reversion, etc.
- Multi-timeframe - analysis, market structure, indicators etc.

I suggest you make a list of how you were taught to trade -- pick your entry, stoploss, take profit, risk:reward, take partials etc etc. The mantras -- "always use a stop loss", "place your SL below the swing low", "enter when RSI is above 75", blah blah

Then, create a second list with the opposite rules. Keep positions open. Create a partial closer based on floating P&L. Trail your stop during news. Count ticks during news. Can you? That's an advantage.

The possibilities are endless...

Keep thinking and one day you will find what works for you.

My best edge came from a programming error.

Good luck!

Anyone wrapped up trying to figure out where the edge comes from can not possibly succeed in long term trading success. I have been trading quite a long time and I believe that those that really succeed follow similar paths. You really want a solid edge?

I am am going to list some very, very successful traders right now. Learn everything you can about them; all of them. I mean really learn. You will then have your edge.

 

1. Kristjan Kullamägi
2. Mark Minervini
3. Dan Zanger
4. David Ryan
5. Stan Weinstein
6. Nicolas Darvas

Personally, my favorite is Kristjan Kullamägi aka QULLAMAGGIE.com I urge you to learn his well documented story of how he traded a $10,000 account around 2011 to over $100,000,000 and he's not yet 40 years of age. He is still going strong. The best part? He charges NOTHING! And yes, that's One Hundred Million US Dollars.

Fantastic post, especially this part.

What is your green zero? I think it's easy to understand what an edge is in the abstract and purely mathematical sense but it can be hard to understand what it may look like in the real world for a lot of people. Something that really helped me understand just one of the forms it may take was understanding how option dealers actually make markets.

I always knew what they were (market makers), but what they did was always a gray area. I understood that they are posting bids and offers but never really knew how they actually make money doing that.

For example, an option market maker's edge is in "making the market" using something like the black-scholes model to give a theoretical value for a market they are trying to make.

They use the model to calculate an option's theoretical price. So say for example the market maker was looking at EUR/USD and was going to price a call option for some strike price 60 days out. He would plug the current price, volatility, risk-free rate, etc into the model which also makes the assumption that prices are normally distributed, and out comes a theoretical price for this option. Let's say $6.75.

He would then go make the market AROUND this price. So he would offer a bid of $6.50 and an ask of $7.00, creating the spread that you'd see in the brokerage account when looking at the contract.

Then someone either hits his ask or bid. Let's say the hit his bid, so he has now purchased this option for $6.50. He knows he needs to instantly sell this contract for higher than he bought it for because he is not taking a directional play, he is only making the market and collecting a spread.

The closest asking price is still $7.00 (his ask), and the current bid is still only $6.50. If he sold his contract at the market price he would make no money, and if he waited to see if someone will hit his asking price of $7.00, he could be exposed directionally if the bids started dropping from $6.50. And remember, he is only trying to collect a spread, so this would mean a ton of risk for a tiny reward.

So what does he do?

The answer was really kind of profound when I first heard it. He synthetically sells the contract for $6.75 immediately after he buys it in order to collect his $0.25 spread over the life of the option.

This spread, between what he bought the option for and what he is going to synthetically sell it for, is the market maker's green zero. It's important to understand though, this doesn't mean his trade is 100% risk-free. Remember he is using a model to synthetically sell the option, which can sometimes have errors or create issues if used incorrectly because models make assumptions.

One of the assumptions of the black-scholes model is it assumes volatility will remain constant through the life of the option, which we know does not happen in actuality.

In order to synthetically sell the option for $6.75, he needs to remain delta neutral with the option he sold. What this means is, he has completely removed any direction risk from the option he holds, by actually shorting EUR/USD directly. So say the option had a delta of .50 and the option was for the right to buy 100,000 units of EUR/USD at the option's strike price. This means he would need to sell 50,000 units of EUR/USD in order to remove his directional risk so that regardless of where the market goes, he gets to collect his spread.

If the price of EUR/USD moves lower and the delta is now .20, he would need to buy back 30,000 units, which would result in a small profit from the price change. Then if the market moved again and the delta went back up to .75, he would need to short an additional 55,000 shares in order to get delta neutral again.

He will continuously hedge his delta until the call option he purchased for $6.50 has expired. At the end of it, if everything, especially volatility, remained constant throughout the life of the option, the profits generated from delta hedging would produce the exact same result as if he really sold his call option for $6.75, allowing him to actually buy the option for $6.50 and instantly "sell it" for $6.75. It just took him till the option's expiration to fully collect the proceeds of the sale.

See what's really interesting about the black-scholes model is, the price given by the model, is the exact amount it estimates he will make delta hedging the call option contract he bought throughout its life. So if the model is right, his trading of EUR/USD directly, synthetically produces the outcome of selling his contract for its "fair price", allowing him to capture his edge of buying below the "true or fair" market price.

Again though, because it's a model it's not 100% risk-free. Chances are volatility is not going to remain constant over the next 60 days, and if he wrongly assumes volatility will be higher than it actually was, the result of synthetically selling the option could end up that he really sold it for $6.35, losing $0.15 on the trade. On the flip side though, if volatility is even higher than he estimated, the result of his delta hedging could be that he synthetically sold the option for $7.25, even more than he initially expected.

So even though the delta hedging eliminates the market maker's directional risk, he still has exposure to volatility and can lose money if he wrongly estimates what it will do. But market makers continue to stay in business while traders continue to blow up regularly because volatility is a lot easier to estimate than direction.

So now that you know what a real edge looks like, what its risks are, and how they can play out, I think it's important to determine if you can explain/understand your edge as clearly as the one above. If you can't, there is a good chance whatever one you think you have is not really there.

I will give a very simple example: Take 500 Trades forward testing. If you are in profit at the end of the forward testing with the same rules for Entry, MM and your Headspace(Psychology) - that is your edge. If you cheated only once(would of, could of, should of) you must return back and start from the beginning.

You will loose money if you do not do this exercise.

Success and Profit at the end of 500 trades with the same rules = your edge.

"Linda Raschke on Having an Edge in Trading..."

...probably it's right place to...
Jason Shapiro&Linda Raschke

The real edge is found in watching the market(s) and spotting initiation moments that lead to (strong) momentum moves or by spotting exhaustion/reversal windows.
Trade less and watch more/sit on your hands till these opportunities arise leads to making much more money in the end.
It's clearly a experience-thing and how good/advanced your skill, tools and method has become.

There are also days without trading because the movement isn't woth it or the overall sentiment is low/neutral/whipsawish.

I prefer watching now BTC, DOW30 (otherwise the ES/SPX500) Nikkei (asia session) and GOLD usually by setting the quote-timer at 8:00 a.m. (NY time) every day.
Also instruments with cheap overall costs vs. huge price movements should be considered for that kind of trading.

This is what I have come to believe also.

EDGE
this word is used so many times yet nobody can agree to what it actually is...can you measure it? in what units?
Do you have bigger edge if you earn more or have higher % winning trades?

I've been reading books and testing other peoples "strategy" to forcefully fit into one or adopt one. No success. It's all been useless to me in the end. I analyzed and wanted to limit my "strategy" into rules based thing...it got worse...actually i started to lose. I lost so many years trying to fit into something "that it's a must"--> set SL, TP, "great" indicators, volume profile,...if you find yourself in this description, you are not hopeless throw everything into garbage and stick to what you know you are good at...my thing is observing market movement, for you it can be something completely different. Work on that!
Try everything you think that can help you because you never know where lies a dimond for you. I can't teach anyone what i do as i'm unique trader as everyone else.

Something you can't avoid to is 1000's of hours watching market. Start today.

You might learn something here

New Cable Thread & Other Pairs

Edge is simply having an upper hand over the market,, maintaining the balance between losses and profits. Edge can also be explained as a situation when the trader knows what he or she is doing and only by that the trader can stand a chance to ride the waves of the market without being stopped out.


Maintaining balance in the market.

This is the way I quantify an "Edge" and it worked for me.

Take 500 Trades forward testing. If you are in profit at the end of the forward testing with the same rules for Entry, MM and your Headspace(Psychology) - that is your edge. If you cheated only once(would of, could of, should of) you must return back and start from the beginning.

Yes, it is a very hard and time consuming work.

Success and Profit at the end of 500 trades with the same rules = your edge. It will guarantee your success.

challenge accepted ! I use Softfx and when i do the backtest I always mid way want to change something or add a new nuance aka overfitting and once I do that I stop myself and start over... this is a very challenging feat especially on lower timeframes but If done properly like you stated after 500 trades and strategy is profitable then great confidence that your sitting on an edge (*also when backtesting please make sure to include commission & spread)

I think it's a nice question that was raised here in this thread,
unfortunately useless for those who most need an answer.
Where is or what is an edge?

the answer is very simple:
when one reaches the point where one accepts that Work, Intellect, individual abilities or Luck are not enough,
one overcomes oneself and one's own ego,
then the edge appears itself

it's nothing special,
there are many examples in life that require the same thing,
when a carpenter or a blacksmith has spent dozens of thousands of hours on their work
and they are still convinced that they will be able to make the best table or the best sword,
then they have found the edge

trading is not a job, it is a craft, where practice makes master

life itself, that's it

Few things to mention here. Edge cannot be contingent upon profitability. By that logic the moment you are not profitable, there is no longer an edge and that simply is not true. You can experience losses but still have an overall edge on the market.

Edge does not depend on profitability. Consistent profitability depends on edge. The edge leads to profitability. Profitability does not lead to an edge.
In essence the profitability is the result of an edge. Your edge should be something that is clearly specifically defined and if your edge is defined only by the result of an edge then you are not saying what the edge is. If I say my edge is 20,000 in profit last month that does not clearly define my edge.

Secondly, if you are of the predisposition that the markets change, you are thereby invalidating the notion of an edge. These 2 are mutually exclusive. Both schools of thought cannot exist at the same time nor be reconciled. If markets are always changing, then your edge will be invalidated based on market changes. Even if your edge is adaptability, that would mean the market is setting the tone and when it changes you are changing after you have lost to the market which is not really an edge on the market if you are not able to predict it's changes.

The essence of an edge is predicting market direction and if you grant that markets changed, then you are already admitting that you do not have a real edge. The fact of the matter is, the essence of markets are the same and have not changed since humanity. The markets are a buyer, seller, item to be bought/sold and the negotiation to reach an agreement between the buyer and seller. That is it. A market can exist in all forms that are different aesthetically but have this same core principle. You selling a car to a friend, a corporation acquiring another corporation and buyers and sellers in a financial asset all have the same core market principle of finding an agreement at a price between buyer and seller to facilitate a transaction meaning all three of those scenarios are markets. A market exists to facilitate a transaction and that will always be the same forever. Markets do not change. This is how they can be predicted with an edge.

Lastly. Your ability to predict price movement is only as could as how comprehensive and compelling your edge which means your edge needs to be multifaceted and multilayered. Essentially you should have a multiple edges that all form one edge and they should all be compelling and all be clearly defined. You should have a document that has your edges written and defined clearly. Here is my edge:



When you click on the Edge circle the circle below opens and written in this circle are 4 compelling edges that I have on the market.



All my trades are exactly the same. Uniform based on Nobel prize winning work and not some shoddy second rate strategy found on an abandoned online trading forum posted by some guy high off his behind in his mother's basement somewhere. I know exactly where my buy and sell areas are on every single asset every month days before the month even begins. Accuracy is extremely high and most importantly it is mechanical step by step meaning it has universal usability. Anyone can use it. 0 discretion needed. This edge is only possible if you fully understand that the core of the market is the same regardless of time, asset, size, or nature. With this I wish to complete William Vickrey's noble work and ambition which is to use capitalism as at tool to facilitate socialistic endeavor. By definition does that not make this capitalistic tool socialistic as well? Of course! And therein lies the simultaneous and inconceivable oneness and duality principle where two opposites(capitalism and socialism) become one and all religious and spiritual denominations which profess this principle task their proponents realize that it is in the totality and completeness of 2 opposites that divinity resides. With this capitalism/socialism union, we may be able to glean God's power and correct the horrors of this world and actually help people in need. Bear witness to one who holds the keys to the city, a means by which not only I but we are able to self exalt.