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A trader's edge - myth or reality?

  • #1
  • First Post: Feb 18, 2010 5:04am Feb 18, 2010 5:04am
Let me preface this by saying that I am not yet a consistently profitable trader. I mostly trade demo accounts or tiny lot-sizes. I've tried many systems, written numerous EAs and have most recently been developing a manual trading system of my own. This system appears, on my manual back-testing to be profitable, but I am hoping to code most of it so that its true efficacy can be tested without any allowance for human "curve-fitting". This brings me to my thoughts on the trader's edge.

There are some accepted "truths" in the forex world. One of which is that round numbers serve an important role in support and resistance. My challenge to anyone out there is - prove it.

You can draw any number of horizontal lines on a chart and price will appear to 'react' to these lines. There are so many turning points in price that anything, be they moving averages, trendlines, or price levels will appear to be 'respected' in some way by price movements.

Let's say that whatever system you're using suggests that a new trend is beginning, however a round number lies in your path. Is it best to avoid the trade because of the round number? Common trader knowledge would, I assert, be yes. Wait until the round number is breached before taking an entry. However, does this actually give us an edge - can we prove this is any way? If it truly is the case that round numbers provide a strong level of S&R then could we simply not, with a random entry EA, take what would be a 50% win rate, and improve the edge simply by adding a round number filter? If not, why not?

I guess my point can be boiled down to two things:
1. The 'truths' of the forex world are often taken for granted. What proof do we have that they are not just myths?
2. Price will appear to 'react' to whatever lines and MAs that you put on the chart. For every bounce off a round number, surely there's the same number of bounces off any other number.
  • #2
  • Feb 18, 2010 7:01am Feb 18, 2010 7:01am
Try searching for this research paper :

"Currency orders and exchange-rate dynamics:
explaining the success of technical analysis"
by C. L. Osler

It is quite a well researched and detailed description of how and why various orders tend to cluster at or just beyond round numbers.
  • #3
  • Feb 18, 2010 10:51am Feb 18, 2010 10:51am
Vorbis:

Just found and downloaded the 45 page PDF. Thanks for the post. The study looks interesting.
  • #4
  • Feb 18, 2010 12:54pm Feb 18, 2010 12:54pm
The only way that you can have an "edge" is if you take an unorthodox view of the markets.
  • #5
  • Feb 18, 2010 1:41pm Feb 18, 2010 1:41pm
well, let me throw something out there. you dont NEED an edge. if an edge was absolutely neccesary to make money, the market wouldn't exist. think about it, the market exists because people are still trading and making money. not everyone making money can have an edge, otherwise it wouldnt be an edge. fromt that theory you dont NEED and edge to be a successful trader. an edge can make you successful faster maybe, but you dont need one to be successful. it will just take time.

if you take your time and stick out all the losses and can actually afford to be in the market, you can eventually become successful. it wont be easy and wont be fast though, but it can be done. experience and patience are key.
  • #6
  • Feb 18, 2010 2:20pm Feb 18, 2010 2:20pm
I don't want to bear the burden of trying to prove your example statement true... but I perceive round numbers to be points of price action more often than is possible by random occurrence. I think your thought to question common beliefs is quite healthy and creating this thread to discuss them is a good thing. This just happen to hit on something I wrote about in my own thread, which I recently learned myself. Take it at face value.

I found this tidbit on another thread from a published bank paper, which I believe to be true.

"Spot transactions constitute about 30% of the total volume in the global FX market, forward transactions account for around 10%, while the swaps and options markets account for more than 50%." Why is this significant?

Options are priced at the *.--00 and *.--50 levels!
That is a little more solid evidence for why these are important levels.
Perhaps it has been mentioned by everyone, but I never really knew the REASON why, though I took it as truth.
  • #7
  • Feb 18, 2010 3:07pm Feb 18, 2010 3:07pm
Thanks Intu. Can you link to the original source on the options bit? Oanda's news service has options related news and now that I think about it, the price seems to be 00 and 50 levels.

Seems like you could place your orders at those levels and see if price bounces or moves through, like a pivot point.



Quoting Intu
I don't want to bear the burden of trying to prove your example statement true......
  • #8
  • Feb 18, 2010 3:29pm Feb 18, 2010 3:29pm
Quoting blacksun1
... an edge can make you successful faster maybe, but you dont need one to be successful. it will just take time.

if you take your time and stick out all the losses and can actually afford to be in the market, you can eventually become successful. it wont be easy and wont be fast though, but it can be done. experience and patience are key.
No disrespect intended, but trading is a techical skill, no more and no less. Perhaps 'edge' isn't the best word...maybe 'plan' will suffice. If you just randomly place trades with no thought process, no understanding of the market, but just HOPE that it goes your way, chances are you wil lose money much faster than you make money. If you keep doing the same thing over and over and expect different results, you will be disappointed. And with less money.

You need to have something that gives you better than a 50/50 chance at the markets. Maybe that is pattern recognition, or a trading plan for the London open, or support/resistance, or whatever. But to consistantly make money, you should have something that tells you "now is the time to enter a high probablity trade and this is why...". That is your edge.

To think that if you just stick it out, after "X" amount of time, a person will magically become successful is illogical. The only way time can help you become successful is if you are learning something along the way. If you don't get better (ie. get an edge or develop a plan), time won't make you wealthy, just older.

My two pips worth....
  • #9
  • Feb 18, 2010 3:35pm Feb 18, 2010 3:35pm
You need an edge to be profitable in the long run. Generally, this is something traders realize,discover on their own, as an edge is only an edge if it is not used by others. I doubt you will read any edge on this forum. Traders who have great edges, may give som hints,but still leave you with a vague impression.

Money management,emotions,follow the trend, and everything else that circles this forum are just tools to help you capitalze on your edge. A bad trader will still lose,even if he knows a good edge.

Generally, an edge is found through experience, and existence common knowledge, combined,tweaking etc.

Being a good consistent trader is really really hard. It is really about experience,understanding the market, and having vast knowledge of common principles.

Except having an edge, it is also about understanding the market. they are interrelated. Understanding the market, requires years of experience, and understanding the market, and yourself require theoretical knowledge as well. Everything is interrelated and required, and being a great trader is really really hard.
  • #10
  • Feb 18, 2010 4:22pm Feb 18, 2010 4:22pm
Quoting moneymaker2
No disrespect intended, but trading is a techical skill, no more and no less. Perhaps 'edge' isn't the best word...maybe 'plan' will suffice. If you just randomly place trades with no thought process, no understanding of the market, but just HOPE that it goes your way, chances are you wil lose money much faster than you make money. If you keep doing the same thing over and over and expect different results, you will be disappointed. And with less money.

You need to have something that gives you better than a 50/50 chance at the markets. Maybe...
who said anything about magic? of course you have to have a plan. but a plan is not an edge. you never said plan, you specifically said edge. what i meant about stciking it out is that after being in the markets for a while a trader will learn how the markets work. he will be able to "read" the charts. of course he will need a plan in order to do this. and your right, you need to be learning something along the way. and that is the market, not some system or indicator or whatever. i know a trader who can consistently make a profit every month. her win to loss ratio is huge. something on the order of 10:1 to 15:1. she does this consistently. and she doesn't have an "edge." she's been in the market almost fifteen years and has learned how it works. again, she doesnt get it right every time, but she makes it work. it all comes down to experience. that's it. you can try all the stuff you want and think you have an edge, but you'll still end up losing. learning how to trade takes time. lots and lots and lots of time. years and years. along that journey you will realize that the only thing that works is your own brain. you look at the chart and make a decision. it is that simple. people overcomplicate things and get bogged down.
  • #11
  • Feb 18, 2010 5:09pm Feb 18, 2010 5:09pm
Quoting blacksun1
who said anything about magic? of course you have to have a plan. but a plan is not an edge. you never said plan, you specifically said edge. what i meant about stciking it out is that after being in the markets for a while a trader will learn how the markets work. he will be able to "read" the charts.
If you are able to predict future price movements with some degree of certainty - i.e. learning to "read" the charts - then you have an edge. An edge simply means that you approach has a higher probability of success than flipping a coin (50/50).

Quoting Vorbis
Try searching for this research paper :

"Currency orders and exchange-rate dynamics:
explaining the success of technical analysis"
by C. L. Osler

It is quite a well researched and detailed description of how and why various orders tend to cluster at or just beyond round numbers.
Thanks Vorbis - that's precisely the sort of thing I was hoping to find! Something that looks behind the scenes at the question. I'll have a read now

Quoting Intu
I don't want to bear the burden of trying to prove your example statement true......
That quote is actually from the paper Vorbis posted, funilly enough. That does lend good credence to the idea about .00 and .50 levels. I would caution that the paper was published in March 2001, so I do wonder if the options market still represents 50% of the global forex market. What about futures?
  • #12
  • Feb 18, 2010 6:45pm Feb 18, 2010 6:45pm
Quoting Troikaone1
The only way that you can have an "edge" is if you take an unorthodox view of the markets.
that i tried 10 times this week.
  • #13
  • Feb 18, 2010 7:51pm Feb 18, 2010 7:51pm
Quoting Troikaone1
The only way that you can have an "edge" is if you take an unorthodox view of the markets.

Quoting woo
You need an edge to be profitable in the long run. Generally, this is something traders realize,discover on their own, as an edge is only an edge if it is not used by others. I doubt you will read any edge on this forum. Traders who have great edges, may give som hints,but still leave you with a vague impression.
Well said and also well said.

Except an edge is still an edge if it is known by a few but not many.

Anyway, read my signature.
  • #14
  • Feb 18, 2010 8:53pm Feb 18, 2010 8:53pm
Quoting Mindsphere
Let me preface this by saying that I am not yet a consistently profitable trader. I mostly trade demo accounts or tiny lot-sizes. I've tried many systems, written numerous EAs and have most recently been developing a manual trading system of my own. This system appears, on my manual back-testing to be profitable, but I am hoping to code most of it so that its true efficacy can be tested without any allowance for human "curve-fitting". This brings me to my thoughts on the trader's edge.

There are some accepted "truths" in the forex world. One...
You are right to a certain degree. Knowing that round numbers are substantial is not the same as knowing how to take advantage of them. The edge is knowing how to use them to give us an edge. So saying prove to me that round numbers are an edge is like prove to me you can have an edge. So all the little questions on how to react using round numbers are all part of what are either going to make you up as profitable or not. This is part of the research and experience, and developing YOUR edge. Prove these things to yourself and you have a chance at exploiting a part of the market.

Best
Mike
  • #15
  • Feb 18, 2010 8:55pm Feb 18, 2010 8:55pm
Quoting Vorbis
Try searching for this research paper :

"Currency orders and exchange-rate dynamics:
explaining the success of technical analysis"
by C. L. Osler

It is quite a well researched and detailed description of how and why various orders tend to cluster at or just beyond round numbers.
I have read many of her papers and spoke to her a few times as well. The papers are well done. What they naturally do is confirm our thoughts that round numbers are significant. Although I could tell you much of this in summary it is good to have real data to back this up. It will help give you confidence in the 'tools' we then use. Because as traders we must not be looking for the fool proof grail, instead just to gain a edge however big or small, understanding full our edge so we can trade it through the ups and downs(where most people ditch out).

Mike
  • #16
  • Feb 18, 2010 10:48pm Feb 18, 2010 10:48pm
Quoting PipStar
Well said and also well said.

Except an edge is still an edge if it is known by a few but not many.

Anyway, read my signature.
True, but this fact then implies, that you wont generall y find any edges reading a book. However, one cant rule out the possibility that some on the forum might once in a while shed some light on edges
  • #17
  • Feb 19, 2010 12:07am Feb 19, 2010 12:07am
I'm glad you found that article, because I was trying to turn find/recall what I had read and in what thread it was, with no luck.

In response to Dr Zeus' curiosity, I did find some other supporting evidence that the swaps (options) are a major percentage of overall forex transactions. This was cut from Wikipedia's entry for Foreign Exchange Market: (it has data from 2007)

According to the Bank for International Settlements,[2] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion as of April 2007. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:

  1. $1.005 trillion in spot transactions
  2. $362 billion in outright forwards
  3. $1.714 trillion in foreign exchange swaps
  4. $129 billion estimated gaps in reporting

  • #18
  • Feb 19, 2010 1:25am Feb 19, 2010 1:25am
Quoting blacksun1
if you take your time and stick out all the losses and can actually afford to be in the market, you can eventually become successful. it wont be easy and wont be fast though, but it can be done. experience and patience are key.
This, in a way, is an edge.
Orderliness of Randomness
  • #19
  • Feb 19, 2010 1:44am Feb 19, 2010 1:44am
Round numbers work, but their true reliability lived in the past, where market was way more simple and inefficient. Now there is crowd thinking: "I'm smarter and im gonna place my limit order 10 ticks below the round number so i will be able to avoid false breakout". touching the round number activates stop loss, take profit and limit orders and price sails to "wise than others men" orders too. Other people, knowing what these people think, try to adapt too, and attack the market, where it's not expected. In this situations, that appear like breakouts, which maybe 20-30 ticks below/above supp/res level will still not lose its properties and reverse the direction. However, we shouldn't just talk about round numbers, but two zeroed and 3, 4 zeroed number. The difference is huge.
''That's all it takes really - pressure and time''
  • #20
  • Feb 19, 2010 3:00am Feb 19, 2010 3:00am
A trader's edge, myth or reality ? I believe you can find your answer by studying Efficient Market Hypothesis. Louis Bachelier's theory is that nobody can beat the market except by sheer luck. Later people like Paul Samuelson also widely promoted EMH and it is very well received. He classify those cases of people making above average returns as UNEXPLAINED. I believe till today, it is still "unexplained". And if you look into those unexplained cases, these people do not think that markets are efficient, and that they DO have an edge, people like Warren Buffett. Their works are a testimony of an "edge".
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