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An Edge In The Markets

  • #21
  • Apr 22, 2011 9:47am Apr 22, 2011 9:47am
Quoting bug
I respectfully disagree with this, mostly academic, understanding of the markets. I would define edge as the ability to profit from the moves in markets in a consistent fashion without regard to the method that was used to arrive at a profit. If you are a large bank that is focused on arbitrage opportunities then you really do need inefficiencies to capture profits. You could also profit by taking trades based on the inefficient pricing of economic fundamentals as it applies to exchange rates. These are areas where the academic interpretation applies*....

Wow....very intelligent post!!! Very good explanation!!
  • #22
  • Apr 22, 2011 10:40am Apr 22, 2011 10:40am
Hello Guys,

I am exploring the forex society for only two months now so you can call me very noob and thats true! But I am a hard-working noob

After reading so many books, browsing so many forums, testing so many systems, blowing so many micro accounts, I think I am finally getting closer to the bitter truth.

If there is any Edge exists, its Self-Control! Its the ability to make a money management policy and follow it no matter what. When nothing can predict the next 20 seconds of the chart, then its the best you can do - risk your money within a limit. A stoch, RSI and EMA is probably all needed for a normal trader but you must have to control your-self until you see the opportunity to trade, bury your emotion when you are wrong and accept the loss, accept the fact that this is an unpredictable market.

Its not the indicators that make a PRO trader, its the mentality one develops with his experience.
" The fool who never traded Demo "
  • #23
  • Apr 22, 2011 11:51am Apr 22, 2011 11:51am
Don't fall into the trap...

Examining your trades (after they are closed) you can falsely label your lack of profits as deficiencies of your "psychology".

The trade that moved against you quickly (and too far).
You: I didn't cut my loser fast enough.

The trade that was profitable but you exited too soon.
You: I didn't hold my winning trade long enough.

We have some very smart people on this forum, that can program some 'monster' EAs... they can manage risk perfectly, have no deficiencies of "psychology", they will take every valid signal never affected by their current P/L or recent losses or fatigue or a crying baby in the background.

Random chance plays a large part, we trick ourselves into believing we have some 'edge' (when we actually do not) and it is our psychology defeating us.

If that were true, there would be many more profitable EAs.
(even if the best were kept super-secret)

Without good psychology and risk management, you will defeat yourself.
I agree. I do it all the time.
  • #24
  • Apr 22, 2011 1:12pm Apr 22, 2011 1:12pm
Quoting AmareX
Its not the indicators that make a PRO trader, its the mentality one develops with his experience.
I'm sorry to break your bubble like this but this is not true. Without a working knowledge of the markets (what moves why, how and when) and without a proven method of entry/exit you are no closer to making profits regardless of your efforts in the field of personal psychology management. Only focusing on money management and your psychology limits the speed at which you hand out your account to other traders but does nothing to increase your account balance.

I believe psychology is an important part of what makes for a consistently successful trader, part of a tripod as it were. On the other hand I am tempted to agree with the members here who think there's been too much focus on psychology lately, so maybe it's not a tripod at all. If I were to rank psychology, knowledge of how the markets work and a proven strategy I would rank psychology as the last one. You could actually do without psychology (more on that in another post).Why? It's a lot easier to 'fix' your psychology when you have the other two in place.

Examples
If you know how the market reacts to key levels and see your position reverse you'll get out and wait for another opportunity (or take the reverse trade). If you don't have the slightest idea of how the market works then maybe you'll stay in, watch your trade fail and then blame your attitude when it wasn't your attitude at all that caused you to lose. It was insufficient education.

Let's take another example
If you don't know the differences between fx pairs you'll be tempted to analyse them all as if they were the same. But they're not! You might have a strategy that works fine on fiber but doesn't do all that well on cable. For the sake of argument we'll assume that you don't know that at this point. The difference in liquidity and therefore sudden 10 pip market moves is greater in cable but having no prior knowledge of that, it can throw you off the train and into the ditch called 'psychology'. Lying in the ditch regretting and self-loathing you'll find a selection of authors who can't trade themselves but have all sorts of suggestions about what you should do about your psychology to enhance your bottom line. Climb the hell out of that ditch and start educating yourself! There are plenty of (free) resources out there so there's nothing stopping you. I have started two threads to gather useful and interesting education/information into one place and you'll find some of that there. But there's plenty more here on FF and elsewhere. Do some looking.

Suggested reading on the same topic: Important – Why systems are profitable (or not)
If you don't risk, you don't ever have to lose.
  • #25
  • Apr 22, 2011 1:28pm Apr 22, 2011 1:28pm
Quoting bug
You could actually do without psychology (more on that in another post)
See below.

Quoting Intu
Examining your trades (after they are closed) you can falsely label your lack of profits as deficiencies of your "psychology".

The trade that moved against you quickly (and too far).
You: I didn't cut my loser fast enough.

The trade that was profitable but you exited too soon.
You: I didn't hold my winning trade long enough.
Intu, you are onto it. Let me see if I can better explain what I think it is that you are trying to say:
If by statistical analysis you determine that you could really have made more or lost less, then adjust your rules. Playing around with your rules because one or two trades left you feeling bad is just stupid. Follow the rules and be done with it. If the rules don't reflect current market conditions (anymore), tweak them.

No psychology needed
If you don't risk, you don't ever have to lose.
  • #26
  • Apr 22, 2011 1:34pm Apr 22, 2011 1:34pm
Quoting bug
I'm sorry to break your bubble like this but this is not true. Without a working knowledge of the markets (what moves why, how and when) and without a proven method of entry/exit you are no closer to making profits regardless of your efforts in the field of personal psychology management. Only focusing on money management and your psychology limits the speed at which you hand out your account to other traders but does nothing to increase your account balance.

I believe psychology is an important part of what makes for a consistently successful...
That was a really good post. Pretty much my thoughts exactly. However, you underestimate psychology from the professional viewpoint. When you are already a successful professional trader yet you are not reaching your full potential. It usually has something to do with psychology and character makeup. What makes the difference between a 200,000 profit per quarter trader and a 1,000,000 per quarter trader? If they have similar access to capital. It usually is not methodology related but psychology related. Thats why hedgies and prop desks put so much resources into trader development.
  • #27
  • Apr 22, 2011 1:40pm Apr 22, 2011 1:40pm
Quoting bug
See below.

If by statistical analysis you determine that you could really have made more or lost less, then adjust your rules. Playing around with your rules because one or two trades left you feeling bad is just stupid. Follow the rules and be done with it. If the rules don't reflect current market conditions (anymore), tweak them.

No psychology needed
Well said

Could you give me an example of what you mean by 'tweaking' rules based on market conditions changing? if you dont mind...

cheers
  • #28
  • Edited 2:44pm Apr 22, 2011 2:22pm | Edited 2:44pm
Quoting Guerrillawar
What makes the difference between a 200,000 profit per quarter trader and a 1,000,000 per quarter trader? If they have similar access to capital. It usually is not methodology related but psychology related.
I agree that the larger the account, the bigger role psychology starts to play. I think this is obvious if you look at the trades Paul Tudor Jones took with the subprime debt. It took quite a bit of time to work out. The chance that news items and price action cumulatively start to work against you is a real danger. I think the same can be said about long term investing a'la Warren Buffet. He is constantly criticized for this and that deal but most of them work out very well. I believe most of us would have trouble holding on to billions worth of positions for such long periods of time. But then again, he is a man who digs deep down into numbers and maybe he doesn't care all that much for sentiment.

As an addition I would like to point out that not only the amount of money, but the length of time if takes to work out can play tricks on your mind (Troikaone1 already knows this). I should still mention that my account can't be measured in billions (without putting a zero, a point and a few more zeros after that) so this is largely theoretical as far as HUGE accounts are concerned. The above logic applies to $40 vs $1000 accounts so in large part this is from experience and not that theoretical at all.

PS. I actually meant to write all of that into my previous post but the train of thought took me on another path. Thanks for pointing that out.

Quoting Pipalicious
Well said

Could you give me an example of what you mean by 'tweaking' rules based on market conditions changing? if you dont mind...

cheers
Sure. Say I have a strategy that has been proven to work on fiber M5. I look for a moving average crossover, a 123 pattern or a double top/bottom and enter the trade after a pullback. My SL and TP are fixed. Things work out for a while but all of I sudden I get stopped out more often and my trades don't bring in enough to cover my losses. It could be that markets have gotten more or less volatile in which case updating the SL and TP according to changes in average daily range should help. Of course, an astute trader has his eye on ATR every day (many here use an on-screen indicator that displays ATR/ADR).

Some solutions require you to 'go all Excel on it' and may not be that visible without proper analysis. The above is the simplest and most straight-forward example I could think of but I hope that now you understand what I mean by tweaking.
If you don't risk, you don't ever have to lose.
  • #29
  • Apr 22, 2011 6:38pm Apr 22, 2011 6:38pm
many will claim to have an edge, a system of some sort and indicator or a technique . i will attempt to give you the edge

You are the edge.

its not a system or psychology, because a robot could do this better than a human. a robot can be faster, doesnt have emotions, and executes to perfection. that is not the edge.

the edge comes from your mentality, psychology is a part of it, the reason and purpose for trading, the will to succeed, the hunger for knowledge and the courage not to give up.

there is no system that will give you the edge, again is you.
know the market you are trading, analyse the charts and price movements, be aware of major economic and policy changes by the central banks.
trading is an art not a science cannot be predicted by mathematics and its not true that patterns repeat.

no pattern will be the same and chart candles or bars are footprints of price, with experience, learning the rhythms of wave movements, the force strength time of price advance, trading in the now, and actively questioning if you want to be in your position. the market is alive, be water, the water that flows according to the terrain. have a strategy, know your self, how to use the resources that you have.

knowing when to hold, press, scale back, or liquidate your position.
do not gamble. one of the most important things is not to learn to take a loss.
like its taught conventionally but to know how to make a bad position into a winning position.
AVT INVENIAM VIAM AVT FACIAM
  • #30
  • Apr 22, 2011 7:44pm Apr 22, 2011 7:44pm
Quoting Nervousone
...too many people get discouraged or look for the holy fail err I mean holy grail their whole trading "careers" instead of just sitting down and spending some good quality time grinding out some knowledge from the vast resources available to us.
Yes.

Thing is, I don't think most people realize they're looking for a holy grail. They don't equate the constant searching and jumping from method to method, changing of rules, etc., to looking for the holy grail. So they, and this includes me when I first started, don't even pay attention to it. Like it's so obvious they aren't looking for the holy grail that they don't give it a second thought. Well, if you don't stop for a second and actually stick to something for a length of time and test it thoroughly, then yes, you are looking for the holy grail and you will never be successful. You must stick to something and see it through.
  • #31
  • Apr 24, 2011 12:28pm Apr 24, 2011 12:28pm
An edge doesn't exist in any market. Without good psychology and risk management, you will defeat yourself.
  • #32
  • Edited Apr 25, 2011 3:14am Apr 24, 2011 6:25pm | Edited Apr 25, 2011 3:14am
How about a tie?
I work on psychology and technicals at about the same pace.

The more plain a method / higher TP:SL ratio you have, the lower the need for psychology; and, the saner you are, a smaller edge will work.

The thing I've found about psychology is that there are lots of good advice on this site and elsewhere, and very little to no practical know-how on how to carry through such good advice when one trades.
  • #33
  • Apr 24, 2011 7:32pm Apr 24, 2011 7:32pm
Quoting ExcluForex
An edge doesn't exist in any market. Without good psychology and risk management, you will defeat yourself.
There is a right way to trade and a wrong way to trade. Once a trader figures out the right way to trade......I feel they will have an "edge".
  • #34
  • Apr 25, 2011 3:44am Apr 25, 2011 3:44am
Quoting ha-pattern
How about a tie?
I work on psychology and technicals at about the same pace.
I don't know if this is a question you wanted me to answer but I'll give one to you anyway. Personally I have no interest in 'winning' the argument over how many percent of your trading success lies behind focusing on psychological issues versus education. The posts I've written on this thread reflect my convictions and beliefs about succeeding based on my personal experience. I am willing to admit that people are different and some probably need to focus on the mindset a bit more (or less) than I do. What I don't like, however, is the suggestion that psychology is the end all be all solution to a trader's problems. Education and psychology are both important but most certainly not at the expense of boxing out the other. So I guess it's a tie (or a stalemate?).

Quoting ha-pattern
The thing I've found about psychology is that there are lots of good advice on this site and elsewhere, and very little to no practical know-how on how to carry through such good advice when one trades.
You've hit the nail on the head. I've come across the same issue and there's no easily visible solution to it. To solve it, I've had to read a lot on psychology (sport psychology included, google it), brain science and everything in between. I've come away with a lot of good advice but I haven't started compiling it into one comprehensive file (right now the information is all sprinkled about in various web links). If you want to know more shoot me a PM, I don't want to dilute the main topic of this thread by going into psychology.
If you don't risk, you don't ever have to lose.
  • #35
  • Apr 25, 2011 5:35am Apr 25, 2011 5:35am
Regards psychology it does have its place however in my experience the essence of so called 'psychology' has everything to do with how well you 'mentally' manage your DD periods if trading manually.

As for having an 'edge' or robust system/method the only way (IMHO again) to define and KNOW if you have an edge is by answering the question 'Why does it work'? (putting aside the equity curve....).

  • #36
  • Apr 25, 2011 7:56am Apr 25, 2011 7:56am
Its interesting that people persist in believing that mindset is the most important thing. One individual who I love to read is Dr. Steenbarger. Even he a psychologist dismisses all this about mindset being the key element. He believes in the mastery principle which I strongly agree with. Its also fun to read what his thoughts are about Mark Douglas and the like. If you read carefully you will see what he thinks about him.

Bottom line you profit in the markets by having an edge and then not getting in the way of your edge. Go to Wall Street or London and walk up to the offices of Goldman Sachs and see how they make money. Its from an edge. A lot to do with good information but an edge all the same. Yeah these guys are cocky and confident and have a winners mindset but their mindset does not create profits in their book their edge does.
  • #37
  • Apr 25, 2011 8:07am Apr 25, 2011 8:07am
Quoting Guerrillawar
Its interesting that people persist in believing that mindset is the most important thing. One individual who I love to read is Dr. Steenbarger. Even he a psychologist dismisses all this about mindset being the key element. He believes in the mastery principle which I strongly agree with. Its also fun to read what his thoughts are about Mark Douglas and the like. If you read carefully you will see what he thinks about him.

Bottom line you profit in the markets by having an edge and then not getting in the way of your edge. Go to Wall Street or...
couldn't agree more!
  • #38
  • Apr 25, 2011 8:26am Apr 25, 2011 8:26am
Quoting Guerrillawar
Bottom line you profit in the markets by having an edge and then not getting in the way of your edge.
This is by far the most accurate 'role description' I've seen assigned to psychology.

I guess the reason so many obsess over the importance of psychology is that they tend to get in the way of their edge, or worse, they don't have one at all.
If you don't risk, you don't ever have to lose.
  • #39
  • Apr 25, 2011 8:30am Apr 25, 2011 8:30am
Quoting bug
This is by far the most accurate 'role description' I've seen assigned to psychology.

I guess the reason so many obsess over the importance of psychology is that they tend to get in the way of their edge, or worse, they don't have one at all.
Problem is that newbs will be pointed into wrong directions, if they are told to start working on psychology when they don't have a working edge yet.
  • #40
  • Apr 25, 2011 8:50am Apr 25, 2011 8:50am
Quoting Custos
Problem is that newbs will be pointed into wrong directions, if they are told to start working on psychology when they don't have a working edge yet.
And once they've been there, they'll be sent to 'money management' next
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