A trader's edge - myth or reality?

the ultimate edge in trading is when a traders "use" of breakeven overpowers and conquers the "use" of hope.

Combine that with an account big enough to choke a horse with a 50 pip move, add in some common sense and a sound SIMPLE method and you have the key everyone looks for.

All this talk is way over my head and i thank God for it which is why i dont "get out" often either.

Just my humble opinion of course.

peace,

jim

Wow it got busy in here! Guess I hit a nerve

I'll try and summarise a few more of my thoughts to feed to fire.

All this discussion of money management is moot - that is if by MM you simply mean trade sizing and stop placing. If you do not have a method which will see your win rate (taking into account your R/R) higher than 50%, then you will lose or beak even over time.

James16, I'm wondering if you can elaborate a little further on your point about the use of break-even. Even in the scenario you envisage, you still need to come up with a method which sees the use of break-even as the right decision more than 50% of the time (again taking into account r/r), otherwise it will work against you. Do you have any more specific suggestions for how this decision can be made?

More generally, regarding the edge, Osler's papers are interesting. I do agree with what someone said earlier, however. Her papers were written before order placement was as easy as today. She describes how orders would take upwards of 1 minute to process - certainly not the case today. Order flow is likely a different ball-game.

One thing which I certainly do agree with, however, is the idea that orders stack up behind support and resistance. Once these levels are breached price gains momentum. However - these support & resistance levels are not always clear. How often have we traded these and been faked out? Often enough to make simple S&R trading not profitable, in my experience. The logical solution is to enter later, but this often sees you lose a good chunk of the move and get stuck in consolidation. Which brings me to my thoughts on how we can truly find an edge.

We want to be with the majority of traders in any one trade. If the majority (in a fiscal sense) agrees with us, we will win. Therefore, we look for confluence. What we need to figure out is what are the most commonly used technical analysis tools (I say TA, but I include PA in my definition) by the traders which control the majority of the money. In my mind they are trend-lines, round numbers (give or take 10 pips perhaps) and fibs on multiple time-frames as well as pin-bars on higher TFs. There's obviously a lot to process in this scenario, and it can be rather tiring keeping track of multiple TFs, and multiple different technical tools. Anyway this is only a theory of mine as I have explained earlier I'm not yet a profitable trader. I would like to hear others' thoughts on this - do people think that these are all important things to keep track of? Is there anything I have left out?

Oh and one final thing I wanted to talk about. The fractal nature of the markets. This does not get discussed enough in my opinion. Bill Willliams has explored the concept a bit, but then goes on to detail a trading system (chaos) which does not make logical sense to me. I am extremely wary of anyone in the forex world who makes money by selling books and teaching classes. If they were such profitable traders why would they need to do any of these things?

Anyway, back to the fractal nature of the markets. Bill Williams uses a great example to illustrate what fractals actually mean. Imagine you're asked to measure the coastline of Australia and you're given a 1 metre ruler to do so. After a good 20 years you'll hopefully come back alive with a specific measurement. Imagine then, that you are given a 10cm ruler and asked to do it again. You'll come back with a much longer measurement because you'll be able to resolve greater detail - all the nooks and crannies in the coastline. Repeat the same idea again with a 1cm ruler - it'll be an even longer measurement. This illustrates the idea of granularity. Depending on what granularity you choose, you will be measuring the same thing, but with a different level of resolving power. It's the same with the markets. We look at the 1H, the 15M, the 5M, the 1M. They're all showing as different resolutions of the same thing. Now here's the extra step - in nature, when we look more closely at something like the coastline, or hell even broccoli (see image below), the patterns repeat themselves. What we see zoomed out is the same as what we see zoomed in. The same applies to the markets (for the most part), the 1M, the 5M, the 15M, the 30M the 1H etc should (by fractal definition) all display similar patterns.

The question then becomes - how is this relevant? Well, if all of the time-frames display similar patterns, should not the best entries be given when patterns line up in all (or at least some) of the time-frames? I like to think about price movement in the different time-frames as waves. If the 4H wave is strongly down, as is the 1H, the 15M and 1M, is this not a good time for entry? Should we not pay close attention to multiple time frames for timing our entries? I know this might be a more complicated way of simple saying "trade with the trend", but it's important to recognise that everything is a trend within a trend. Every lower time-frame is a tiny part of a bigger trend. Sorry if my thoughts aren't entirely clear, I'm sort of trying to flesh them out by writing them down.

no nerve here my friend,

your a smart guy. i had to read this 3 times and on the 3rd go round i was just shaking my head. not that your somehow wrong but my insides were "feeling" some of the roads i have travelled over the last 3 decades.

my experience over the last 30 years is that all this "stuff" spoken about by so many well meaning smart people is just mental masturbation.

People think that the real keys to succes in this business are somehow shrouded behind a mystical curtain only obtainable by those with 140 iq's and an understanding of ultra complicated subjects.

Its the exact opposite.

The real keys behind success in this business are found by leaving all that mental crap behind you and understanding some very simple basic truths.

(all the "you's" used below are not directed at you personally mind but meant as general)

1. if you dont treat this as a business anything and everything you attempt will fail.

2. if you cant trade a daily chart with success you cant trade any time frame lower with success. so why try?

3. if you think 3 months of practice is suffecient to start a business and expect positive results then your either naive or brain dead.

4. virtually no one ( even those that treat it as a business) that start with a small account ever see it become a large account. Overtrading kills them all. Give the same trader one account with 250,000 and give him another with 2500 and you will see two different traders.

when 50 pips are worth 5 bucks they will watch it turn into a loss and trade everything they see. when those 50 pips are worth 10, 25, 50,000 they will smile all the way to the bank and FOCUS IN ON 1 OR 2 GREAT SET UPS A MONTH OUT OF ALL THE INSTRUMERNTS THEY TRADE.

5. BREAKEVENS ARE WINS. they should always be counted as wins. a small account holder that learns and implements the value of breakeven over hope is very very rare and should be commended. i tried 8 years with no success and it cost me more than i care to think about.

6. the less on your chart the better. indicators were invented to impress wives and girlfriends. they are good for one thing. conflunce and/or divergence.

i could go on forever and since i type with one finger im getting tired.

i dont get involved on this side of the forum often because I NEVER want to come accross as preachy or as hawking something.

im always available via email to anyone but just remember my one finger.

if any new trader would just refuse to trade with real money until what they are attempting is first proven on demo or a tiny micro account for a half a year or so they would discover several things.

1. there is no such thing as any system or method "THAT WORKS".
they must be combined with some of the points above before that can happen.
MM and RR techniques are a waste of mental energy until a certain "level" of experience and hard knocks have been achieved. that comes with time and practice. if the time and practice is spent the wrong way it will be a never ending nightmare.

2. simple is better.

as i always say all of this is just my opinion. nothing less/nothing more.

its simply comes from my personal experience.

Jim

Multiple timeframes?? "Trends within trends"? Jesus H, what next, someone claiming if you zoom in on individual bars you'll see trends that are just as meaningful in their own right? Nothing to see here, forget this nonsense about multiple timeframes. Here's an entertaining video by legendary trader Ed Seykota.

Reality check. We all need one every now and then.

Thanks, Jim!

can't argue with 30 years experience. I only have 3 yrs experience trading, but i have observed some things in that short time.

breakeven stops should be used based on the method. I trade the trend with s/r entry/exit. If price retraces back to my entry, i don't get out because the trend is stilll intact. But if you use a specific pattern then maybe breakeven stop out is a signal that particular pattern is not solid.

And i also disagree about having the ability to trade on the daily is a pre req to trade other time frame. I believe a timeframe is irrelevant. It only affects your trading cost as the spread becomes a bigger factor as you move to the shorter timeframe. But i did start trading the daily first with 'some' success, and found that short time frames fit me better. The only advantage trading on the daily is the ample time you have to analyze the market..and not be rushed and make stupid decisions.

maybe my beliefs will change as time go by. THe best thing as Jim said is to expose yourself to the market and let it 'teach' you how to trade.That way you can pick the lessons that will fit your needs and move on from there.

What you're saying here is the basis of Elliott wave theory: price movement can be characterized as waves within waves.

This is not true ... first lets define an edge... what is an edge? what gives a person who trades on fundamentals and edge in the markets or someone who trades based on technicals..? you see traders take trades based on ema's, pin bars, support/resistance areas, trendlines, master candle setups, etc.. but still there is a division in the ones that are profitable trading quite the same thing.. you go to a book store and you find 150 books in the trader section all on entry and exits but nothing about risk control. Why? because the more types of entries exhist the more things there are to implement and control there is always a way to show every market turn or major market turns resulting from some tech form or another that is based on a historically building lagging database of past events. When taking my first internship at a hedgefund up in philly.. they told me one of the best marketing tools for financial products is the use of technical analysis.. why? because everything can always be explained in hindsight but many unexpectancies and options remain available creating the illusion of knowledge and understanding giving faith to the idea and creating the idea to check back and see the update and be reaffirmed. This gives control to those who understand how to use it. Tech Analysis creates liquidity for the market and helps build attackable order flow setups for those who know how to manage and control risk. for example.. i have a letter here from citi bond trader.. who is a friend of mine.. names have been blocked to protect the innocent lol..

"hiya mate yeah cheers for that! yeah def free trading is the best...I trade eurogov Bonds for citigroup. To be honest we have an army of analysts working for us that give us data every day on what they think is going to happen, so we take our lead from the desk lead who'll say "right lads you need to hedge this much today" or "theres a big german bond auction today I want you guys to squeeze the market like this". My job is basically a market maker so I dont really get involved in the stuff that u talk about which is why im so interested. On a daily basis Im just squeezing the markets to make it harder for the smaller boys to get good prices..its a dirty job i guess but someone's gotta do it :=)"

altho i guess for you guys this is all hear say.. so without divulging to much they squeeze and change price patterns to manipulate the orderflow.. this can make big changes using the little guys to buy in at better prices.. and well as blocking orders from being placed against.

so right now ur probably wondering where im going with this and the point is... if your trading on expectation of a edge based on patterns and formations your basically for the most part buying into manipulated price patterns for those trying to push price in there direction using order flow manipulation techniques.. psychological factors.. and risk control. If you are trading based on price patterns that is fine but in itself is not an edge.. it just gives a trader the balls to execute and trade trying to find the flow of the market they are trading.. the edge at that point is understanding when it is not a working trade and managing your capital at risk from that point on cutting your losses and letting your trades run when u r with the flow.. so essentially your edge comes from controlling is aspect.. this is money management.. it is by far the most important factor to consider when trading.. it is not the entrance or the exit it is how to CONTROL the normal distribution of the SUM of the Maximum allowable risks while trying to create a right skewed distribution.

please note attached picture of right skewed distribution.. i just created in paint.
and please also forgive my horrible drawing skills.

you discuss this is just math... well this is just statistics and by controlling your risk you can effectively control distance as multiples of N... this for a reference is also discussed in "the way of the turtle" by curtis faith.. while im not advocating the book it is a useful Money Management tool because the turtles for the time where extremely advance in money management and made money understanding that.

as I have already stated that by applying negative or positive expectancy to a system you are in effect placing a limit on your profitability factor.. as many good traders Know trades may last a few moments or for a long while as long as the trade proves to be profitable.. by understanding this.. and limiting losses and applying basics of money management rather then systemic defined areas of profit you are limiting profitability because you are capping your winners even at some point. This negative expectancy or positive expectancy is what you would hear of in a casino... well unfortunately the futures and futures derivatives market and equities market.. is not a casino.. you can not cap your winners and view the market with no sound judgement and run it like it has odds in a casino.. when you hear of traders that are profitable discuss win loss ratios and risk reward setups .. usually these are averages not set areas they are always aiming for as good traders know that the market is not going to confine to their idea or risk:reward and probabilities at all times.
If u want to gamble i suggest blackjack..

A trader is a trader because he understands efficiency and money management.. traders place in the market is to apply liquidity and balance place when it gets off track and its important to note you job in the big picture. If trader didnt exhist to balance the market and find fair value the market would act completely irrationally.

entry optimization isnt what I said.. I said risk control and money management.. I could care less about my entry most of the time i just eyeball it..
that one variable in your methodology that makes you feel like you have an edge is just that.. a perception of edge.. im not saying that there is not a specific edge just that the most usable is risk control and MM.. but people want a perception of edge to give them balls to enter the market.. they need courage.. they know direction .. they know where price is going its easy to see trend.. but they need the courage to enter the trade and so this idea of edge exhists. after they put the money to work .. you need money on the sidelines you need to expect the unexpected you need to control risk.. and a good risk manager/money manager is there ability to control these aspects..

for example quadrenting.. many traders use the quadranting to define an edge.. they say its an edge if it ends up in this quadrant and we can verify that price moves to that quadrant more than against it its and edge.. but we when u systemize it and apply caps to it and limit the upscale and the downside youd reduce whatever edge does exhist by optimizing or curve fitting the "edge" that what would be considered left sided positive expectancy is nothing but a curve fitted model that doesnt work but is an edge..

just using money management and risk control.. you can take advantage of the natural edge and increase effectiveness. what is this money management and risk control exactly? well if we are right sided thinking we dont know what is going to happen in the future.. but we know.. that if a daily pinbar trade has been triggered and a stop is at the low.. you will have a predefined risk.. but allowing a trade then then grow infinitely until the wins far outweight the losses. you make use of a couple things.. the black swan you limit it.. and allow it to also power your trade and also right sided skewing of a normal distribution.. the market is random until it is not and the way to control it when it is not is buy using money management and risk control to reduce when it is random or manipulated.

yes roulette is an example of a negative expectancy game because it is gambling and no you cant beat it with money management but it is also not trading.. so pick a better example thats not a casino game and rigged against you.

you are using the chewbacca defense.. if wookies live on kashyyk but chewbacca lives on endor.. that doesnt make sense so your wrong..

the problem is its not relevant at all to the discussion its a gambling game its not trading and it is rigged against you.

<- reference to your arguement.

you are right to an extent but there is much more. yes one way does account to out of trade aspects another is intrade aspects more than just position sizing and stop.. it has to do with using money to skew probability of distributions and can be used as an effective edge.

I completely agree .. the only good way to move a stop is into profit or closer into profit.. and this is a risk control idea minimizing losses its how to control your position after the entrance is made. note its not place a stop walk away and grind the odds.. its controling the odds as well.. its risk management and money management there is no excuse to let a stop get hit after a trade has been in significant profit because it didnt confine to your positive expectancy criteria.

i agree fully up until the very last part i feel MM and risk management is more important than anything your right it is a business .. its a business of protecting yourself and understanding what works.. which is protecting yourself .. the use of stops.. Break evens. and right sided skewed distributions.

There are numerous books/articles debating whether or not Efficient Market Hypothesis actually applies to forex.
The flow of information in forex is not efficient.
Many of the market participants are not guided by the confines of economic rationality...ie, they just need a order filled (commercial)
Customer spreads do not follow the adverse selection model as predicted my EMH.
And most importantly, Forex is a 2-tier market...etc...etc...

Anyways, their are always two sides to every story...

Hey, as long as you understand that MM won't solve a negative expectancy issue then its all good. For a minute there it sounded like you were saying the opposite. Not sure why you need an entire diatribe to come full circle.

There have been several good threads on this topic. You can look up an old one of mine on 'negative expectancy'... it goes on and on for many pages. I will state what many years of trading, reseach, success and failure have taught me.

1) Daytrading the retail forex market (no overnight postions) cannot be done successfully over a long time horizion for the vast majoity of traders. The market is just to random on a short term basis, from the persepective of the small, retail trader. The only long term succesful scalpers seem to be those that can exploit stop hunts and option barriers. These traders are usually very well funded and patiently wait, sometimes for days or weeks, for a good opportunity to present itself, and then jump in with a high pip value and take 10-20 pips. Then they start waiting for the next opportunity. Boring as hell, but profitable if done right. Other than that, you cannot be profitable daytrading over a long time horizion.

2) Over days, weeks, and months, there are opportunities to be profitable in the retail forex market. It takes a hefty account and the patience of Job, but long term swing trading can be profitable. Many claim EW is profitable over the long term, but I have not been able to see it.

I know many of you disagree with this. I know you have 5K and a dream, and think that with just a few years of compounding, you will own an island and drive a ferrari. Good luck, because you will need a lot of it!!

Regards,

Your thread is definitely worth reading. http://www.forexfactory.com/showthread.php?t=191230

you must be australian?..

and its not coming full circle its thats i dont rather want to post a long post.. i really really dont.. but this is important stuff.. if u wanna be a trader.. is the only chapter id suggest reading in the "way of the turtle" is that one 8 page section that hits on this subject and doesnt get far enough into it.. understanding the reasons for long term success isnt in your system its in your money management and your risk control you can trade anything and make dough just protect ur a double scribble... and control your risk adjusted reward right sided distribution to show higher averaged market define profits vrs losses and dont think u can grind the odds like a casino or youll just die by "death by 1000 stops." or "spread death" which just seemed to be put by fxpetra as i was typing.

Semantics.

Not one person has said MM isn't important, just that it is not an edge in and of itself. MM is applied to an edge. (just how I see it, each person can think what they want).

What is an edge? (My definition)
An Edge is a system or method that gives a higher probability of one outcome over another with positive expectancy.

You don't apply an expectancy to system. Your expectancy is a calculation of your systems performance.

It would appear we are having 2 separate discussions. MM is very important, we agree on that. We disagree that it is an edge (by what I define as edge) or can compensate for a poor method or system.

yup we do disagree..
MM/risk management is not just important it is THE edge.. in any system.. anyways.. ive typed way to much .. the horse has been beat so bad its hard to tell if its even still a horse at this point.

You sound like you might know a thing or two, but I'm still not convinced that money management/position sizing is capable of making you profitable without a variable to your method that makes an outcome more likely than not (profits exceed losses in the LT) IE. an EDGE.

The only way I can make what your saying believable is by assuming that position size varies throughout the trade depending on what the market is doing. This would be essentially the same thing as, and could be replicated by, making a trade at the point that you increase the position size.

Would enjoy further explanation and maybe an example of a trade.

Regards, Leon

I own the book as well, it is interesting and most of the book is about the "turtle system", money management, and system testing and development. The alternative money management that the "turtles" used was tailored to their trend following system. Their "edge" was their ability to ride a long trend if it developed, while at the same time taking huge drawdowns because of their sometimes large accumulated positions.

If money management was the key, Mr. Faith would have spent more than 12 pages on it out of 277 (Chapter 8, pages 109-121, Risk and Money Management). Curtis Faith "blew up" long ago. You can read more about him at the link below. He didn't really present anything new, if you have researched "turtle trading" in depth.

A few of us agree to disagree, I wish you the best results.

http://www.turtletrader.com/curtis-f...rformance.html

Im wondering if you mean making arbitrary randomly based entrances such as coin flipping and then using money management to create an edge.. The answer ive found on this subject is interesting.. through personal research that I have conducted based on this I can tell you a couple of things.. you need a direction and a confirmation, but arbitrary random market neutral entries based on nothing is account suicide.


this question excites me you are correct position size does vary through the development of a trade.. and this is usually why I advocate trading equities over currencies. Using a model of investment at my firm we call the capital injection model we control risk by never allowing the position to be negative but always be positive and pay to be positive. The process is a set and not forget but control way to allocate capital and control risk. For example I have a 325 company watchlist.. these are companies I believe strongly in have good fundamentals and i feel are good all around strong companies.. I use the capital injection model to buy these companies. lets also assume for this example I have 200,000 dollars to trade. using this model i grant a risk of 1% to each company and all is randomly pick long trades.. I draw the line at 45% loss.. or .45% per trade.. some 30% hit that... 30% breakeven and 30% see gains 100-300% but the time we exit at 30% each...
so 10 trades -.45%=4.5%total account
10 trades = breakeven
4 trades run 50%
3 trades run 100%
and 3 trades run 150%
so
losses = -4.5%
gains = +2%(from50% runners)+3%(from 100% runners)+4.5%(from 150% runners)

this is a poorly constructed senario and rather bad its far worse then what ive averaged doing this.
but -4.5%+4.5%+3%+2%=+5% total account congrats U ended in profit..

if all 30% of those trade didnt just hit 4.5%- and hit a full stop ad 5.5% to that and u ended .5% negative waiting to blow out on 30% of ur trades... ridiculous rates. but u get the point.-> this is all general of course.. most simple lets talk about simple trend trading now...with a simple high break...

i post a chart of a trade I cherry picked the worst example i could find....

possibly the words worst pinbar when moved to breakeven it didnt matter u lost nothing and potential too lose alittle but a potential to make alot.. you could take crap pin bars at first support you see and make money just using loss limiting rules.. cause one is gonna run forever eventually. like the 2nd pic


all these pics are worlds worse pinbars.. but would resulted in 2 breakevens and a huge win.. because u move to BE and use a stop and dont limit profits..

http://www.forexfactory.com/showpost...1&postcount=65

example of trade i actually took lol just use basic BE u can see the red line.. i dont care what this things does... full reversal or eurozone falls to pieces.. im BE plus i make interest off it.. its efficient.

didnt say id recommend it just mentioning the right skewed distribution usage in his book.. i dont really think he is a trading prodigy but just using it as a 8 page reference to a part in it... u can have one piece but not all of it