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Where is the EDGE in trading? The most important thing in trading!

  • #161
  • Aug 7, 2011 12:17pm Aug 7, 2011 12:17pm
Quoting isaacyassar
For me, the edge lies in Risk to Reward Ratio ;-)
you need the right combination of win/loss and r:r. If one of the two is too low, then you will trade a losing method.

For example, if you have an R:R of 1:10 and a win-loss of only 5%, you will be trading a losing method.
  • #162
  • Aug 7, 2011 12:18pm Aug 7, 2011 12:18pm
Quoting reres
On the short timeframe u can easily be whiped out by random 20 pip spikes in either direction.... This doesnt happen on monthly chart at all.
And on the monthly timeframe you can be whipped out by 200. But I will leave your timeframe of choice to your own preference. Timeframe isn't what we're really talking about here anyway.

However, I tend to agree that... what you are calling statistical analysis is the same kind of thing that I call another form of technical analysis. And there are many, many forms of TA. However, you have stated:

Quoting reres
.... making categorical mistake here. TA patterns are derived from the current price. How can you predict something if different people are seeing same chart and coming to different conclusions?

Those patterns that i mentioned are derived from historical statistical analysis
TA patterns are derived from the current price to as far back as the beginning of the market. Some analysis goes back decades. Your Dow example does just that. I'm not trying to argue semantics here, But what you are stating does not work, you are also saying it can work. Although in a different form. (Tech analysis does not work / Statistical analysis does)

How can you predict something if different people are seeing same chart and coming to different conclusions?

 Well, that will always happen. No two ways about that. But I watch for momentum setups, at preferable times of day, happening together on multiple markets, that have many obvious reasons to cause traders around the world to also take that setup.

When a setup is good, many traders around the world will be looking at the same breakout/momentum/price action.... and many will be taking the same trade for substantially the same reason. Think about it, a substantially significant amount of professional traders all piling trades in the same direction on the same market. It's not coincidence, it's not random accident. It's technical analysis.

I don't mean to tell you how to think or what you should believe. Just keep an open mind. Because I'm sure of what I'm talking about.

OK, I'm probably done here.... I got work to do.

Take Care
  • #163
  • Aug 7, 2011 12:24pm Aug 7, 2011 12:24pm
Quoting Custos
you need the right combination of win/loss and r:r. If one of the two is too low, then you will trade a losing method.

For example, if you have an R:R of 1:10 and a win-loss of only 5%, you will be trading a losing method.
Indeed. That's why what I meant by Smart Speculation is at least 50% accuracy. If it's more wrong than right then it's not very smart by my simple standard ;-)
The tone of your words reflects the quality and result of your trading ;-)
  • #164
  • Aug 7, 2011 12:27pm Aug 7, 2011 12:27pm
Quoting isaacyassar
Indeed. That's why what I meant by Smart Speculation is at least 50% accuracy. If it's more wrong than right then it's not very smart by my simple standard ;-)
well, you don't need to be 50% accurate. With my example of an R:R of 1:10 you just need a win-loss of 10% to be b/e. If you are correct 11% of the time, then you are trading a winning system.

I rather go for low accuracy, cause those systems tend to be the most robust.
  • #165
  • Aug 7, 2011 12:33pm Aug 7, 2011 12:33pm
Quoting Price
How can you predict something if different people are seeing same chart and coming to different conclusions?

Well, that will always happen. No two ways about that.
Than you dont have an edge if it always happens. In statistical analysis you do have an edge. That was my point and there is big difference.



Quote
When a setup is good, many traders around the world will be looking at the same breakout/momentum/price action.... and many will be taking the same trade for substantially the same reason.

Yes TA can only be usefull for long term trend following as only than there u can see if many traders are allined on positioned on monthly chart but even than it would pay out to use other statistical clues and things like COT data,fundamentals... On short time frames TA is pure gambling.
  • #166
  • Aug 7, 2011 12:42pm Aug 7, 2011 12:42pm
Quoting reres
On the short timeframe u can easily be whiped out by random 20 pip spikes in either direction. Not to mention million other factors.
You really do not get it at all I am afraid.

A profitable and backtested trading system does NOT care at all about these "random" spikes.

Why?

I will tell why, because it has ALREADY been tested with all the previous and numerous historical "spikes". It dealt with them all, one by one. And at the end, after 10 to 15 years of historical data, the system still ended up making money, beating not only the spread but all the market makers tricks and the occasional random spikes it found on its path.

Why?

Because the system is robust, it has a strong statistical edge, period.


Quoting reres
This doesnt happen on monthly chart at all. Trading with price action alone is the way to loose the money.
Surely you are joking, the market makers and the "big boys" can bull/bear trap you just as easily on the monthly charts than on the 1 min charts, are you kidding me? In fact they make even more money when they play tricks on the monthly charts!
  • #167
  • Edited 1:10pm Aug 7, 2011 12:56pm | Edited 1:10pm
Quoting reres
So where excatly is an edge in some trading system? Is there anything that can be said to have definite 60% + edge?

Maybe trading seasonals on futures markets? straddling options before earnings? anything else that has some logic?

Share your ideas
I believe entry method can also give some kind of mechanical edge to a system. I mean like splitting one entry (say 3 lots) into two (@ 1.5 lots) or three entries (@ 1 lot) with different TPs but same SL. The first TP is meant for quick protection while the other is to chase the market aka make the most out of the market, taking all its potential.

It is more sophisticated than simply using 1 entry method, and works in different ways. Good chance to give a boost to a good system =)
The tone of your words reflects the quality and result of your trading ;-)
  • #168
  • Aug 7, 2011 1:08pm Aug 7, 2011 1:08pm
Quoting Mr Breakout
Why?

Because the system is robust, it has a strong statistical edge, period.

Yes and where is the edge ur claiming to have? Thats what we are discussing here. Dont say "oh well i cant give u my system"...just explain the logic behind the system so that i makes sense.

Are you claiming that you have a system based only on TA that works on 1 min, 5 min, 1hour, 1 month charts? and makes profit on all?


Quote
Surely you are joking, the market makers and the "big boys" can bull/bear trap you just as easily on the monthly charts than on the 1 min charts, are you kidding me? In fact they make even more money when they play tricks on the monthly charts!
Markets on monthly charts are not random. On 1 min charts they are. There are no random 300 pip spikes unless central bank intervention happens but that only happens once a year on euro/chf. Its rare occasion. And stop loss can prevent big loss. On 1 min chart u have some much randomness it cannot be compared to monthly.
  • #169
  • Aug 7, 2011 1:15pm Aug 7, 2011 1:15pm
Quoting reres
Yes and where is the edge ur claiming to have? Thats what we are discussing here. Dont say "oh well i cant give u my system"...just explain the logic behind the system so that i makes sense.

Are you claiming that you have a system based only on TA that works on 1 min, 5 min, 1hour, 1 month charts? and makes profit on all?



Markets on monthly charts are not random. On 1 min charts they are. There are no random 300 pip spikes unless central bank intervention happens but that only happens once a year on euro/chf. Its rare occasion. And stop...
I cannot speak for Breakout but my system works on every timeframe from the m1 to monthly.

BTW you use "than" when the proper word is "then".
  • #170
  • Aug 7, 2011 1:25pm Aug 7, 2011 1:25pm
Quoting jag1966
I cannot speak for Breakout but my system works on every timeframe from the m1 to monthly.

BTW you use "than" when the proper word is "then".
Yes, english is not my first language.

If your system works on all timeframes thats fantastic and very good result but why dont you share some insight into what makes it work. Or do you just become one with market and u get a gut feeling on where its going to move?
  • #171
  • Aug 7, 2011 1:47pm Aug 7, 2011 1:47pm
Quoting reres
Lets say that we solve all the problems with traders psyhology and money managment. Lets say money managment is perfect and the trader is trading like a robot. Knowing that trading is just a probability game and not having problems accepting losses ... So where excatly is an edge in trading??... Share your ideas
Money management, which I understand to mean using a stop loss that limits any particular loss to a small, fixed percent of capital, can itself be an edge when sensibly trading as pa18 suggests here ...

Quoting pa18
u think too much

1. trade with trend
2. buy on retrace when trend is up
3. sell on retrace when trend is down

there's your edge
reres, you are focused on winning percentage as the criterion of whether you have an edge or not. An edge will result in a net profitiable trading campaign over time. The most profitable edge may not be the system with the highest winning percent.

For example, you may have a system which wins $10 90% of the time, but you must risk $100 on every trade. So though you win 90% of your trades, at the end of every ten trades, you will, on balance, be operating at a net loss of $10. On the other hand, you can have a system which requires you to bet $10 with a 10% chance of winning $100. In this system, you lose 9 out of 10 times, but at the end of ten trades, you have a $10 profit. This, to be sure, is an over simplified example, and those with a statisical mind could easily point out the flaws in the example. However, the reasoning is valid. Winning percentage is not the key.

The key is expectancy, which is to no small degree influenced by money management. It really is as simple as cutting your losers and letting your profits run. Of course, for most of us, that is the hard part!
  • #172
  • Aug 7, 2011 2:01pm Aug 7, 2011 2:01pm
Quoting reres
...You didnt say anything useful except repeat classical money managment rules. Anyone who took some online course can say that. And with money managment alone you CANNOT be profitable. You can only be profitable by having a clear defined highier probablity win to loss ratio edge....If u disagree than prove me wrong but dont keep repeating money managment rules.
I think you perhaps understand money manageent too little and think that win/loss ratio is too important.

Now, if you are looking to trade for a straight 1:1 risk to reward ratio, where for every trade dollar risked you stand either to lose that dolar or win one additional dollar, then you are correct in that you must, over time, win at least 51% of your trades to be profitable. That is assuming that transaction costs are figured into the one dollar loss/one dollar win. If not, then you would need to win more than 51% of your trades to breakeven.

However, if you are not excluding systems where the average reward is greater than one times average risk, then winning percentage can be lower than 50% and still provide a net profitable, perhaps exteremely profitable system over time.

But if you are trading for a straight 1:1, then perhaps you do not have your psychology and your money management as perfectly under cntrol as you presume in your original post.

Interesting thread by the way!
  • #173
  • Aug 7, 2011 3:04pm Aug 7, 2011 3:04pm
Quoting reres
Yes and where is the edge ur claiming to have? Thats what we are discussing here. Dont say "oh well i cant give u my system"...just explain the logic behind the system so that i makes sense.
My system's edge comes from a simple but powerful emotional fact : When they are losing money, traders panic and start making huge and costly mistakes. The trick is to find the price where their panic, anger and frustration reach an extreme level. And then I buy/sell accordingly.

Quoting reres
Are you claiming that you have a system based only on TA that works on 1 min, 5 min, 1hour, 1 month charts? and makes profit on all?
Yes, even though some currency pairs make less money than others. Remember, the 1 min chart traders and the monthly chart traders are all subject to the same emotion of fear and greed.

Know how to exploit their fear and you will ALWAYS make money in the long run, regardless of the time frame you choose to trade, simple as that.



Quoting reres
There are no random 300 pip spikes unless central bank intervention happens but that only happens once a year on euro/chf. Its rare occasion.
My dear Reres, 300 pip is not even half the average range of a monthly bar! Also, the big boys do not even need to spike the price in a sudden way, they can manipulate the price slowly and you would not even notice.

Quoting reres
And stop loss can prevent big loss.
If you use volatility stops (like 3 times ATR of last 20 days), you could end up with a 600 or 800 pip loss easily if you are trading on the monthly charts.

Quoting reres
On 1 min chart u have some much randomness it cannot be compared to monthly.
Granted, as you use lower and lower time frames the noise increases. But again if your system is robust it will make money regardless of the time frame used.
  • #174
  • Aug 7, 2011 3:12pm Aug 7, 2011 3:12pm
Quoting Mr Breakout

Granted, as you use lower and lower time frames the noise increases. But again if your system is robust it will make money regardless of the time frame used.
Disagreed. Trading costs will become dramatically higher (compared to the average profits per trade). The lower the time-frame, the less absolute profits you make per trade in general, but your trading costs per trade will remain the same.

Depending on the system, trading costs will at one time be higher than the average profits you can achieve per trade. So, yes normally it will be more difficult to turn a profit on low time-frames, just because of trading costs.
  • #175
  • Aug 7, 2011 3:22pm Aug 7, 2011 3:22pm
Quoting Custos
Disagreed. Trading costs will become dramatically higher (compared to the average profits per trade). The lower the time-frame, the less absolute profits you make per trade in general, but your trading costs per trade will remain the same.

Depending on the system, trading costs will at one time be higher than the average profits you can achieve per trade. So, yes normally it will be more difficult to turn a profit on low time-frames, just because of trading costs.
You forgot just one thing Custos, lower time frame = more trades.

Would you like to earn 20 pips a day with a system that generates 1 trade a day on the 1h time frame or make 10 trades a day with an average profit of 4 pips per trade (40 pips/day) on the 1min time frame?
  • #176
  • Aug 7, 2011 3:30pm Aug 7, 2011 3:30pm
Quoting Mr Breakout
You forgot just one thing Custos, lower time frame = more trades.

Would you like to earn 20 pips a day with a system that generates 1 trade a day on the 1h time frame or make 10 trades a day with an average profit of 4 pips per trade (40 pips/day) on the 1min time frame?
In theory this sounds good, but I give you an example. Let's assume you have 2 pips trading costs per trade (not unreasonable).

The 1 trade a day system:
(1 trade x 20 pips profit) - (1 trade x 2 pips trading costs) = 18 pips net profit.

The 10 trades a day system:
(10 trades x 4 pips profit) - (10 trades x 2 pips trading costs) = 20 pips net profit.

Now, with the 10 trades a day you just made 2 pips more profit than with the 1 trade a day. If the trading costs are higher with let's say 3 pips per trade you would make less than by just entering one trade a day (17 pips net profit vs. 10 pips net profit)
  • #177
  • Aug 7, 2011 3:44pm Aug 7, 2011 3:44pm
Quoting Custos
In theory this sounds good, but I give you an example. Let's assume you have 2 pips trading costs per trade (not unreasonable).

The 1 trade a day system:
(1 trade x 20 pips profit) - (1 trade x 2 pips trading costs) = 18 pips net profit.

The 10 trades a day system:
(10 trades x 4 pips profit) - (10 trades x 2 pips trading costs) = 20 pips net profit.

Now, with the 10 trades a day you just made 2 pips more profit than with the 1 trade a day. If the trading costs are higher with let's say 3 pips per trade you would make less than by just...
I understand perfectly what you are trying to say, but I did say 4 pips average PROFIT per trade. In the first case your profit is only 20 pips/day, while on the lower time frame you are making 40 pips/day.
  • #178
  • Aug 7, 2011 3:47pm Aug 7, 2011 3:47pm
Quoting Mr Breakout
I understand perfectly what you are trying to say, but I did say 4 pips average PROFIT per trade.
so, you mean profits after trading costs then. Well, if you can pull that off, then great for you.

I just found that all my systems produce less overall profits (or even resulted in losses), the lower the time-frame is, among other things due to trading costs. The calculation I did before illustrates this tendency.
  • #179
  • Aug 7, 2011 3:53pm Aug 7, 2011 3:53pm
Quoting Custos
so, you mean profits after trading costs then. Well, if you can pull that off, then great for you.

I just found that all my systems produce less overall profits, the lower the time-frame is, among others due to trading costs. The calculation I did before illustrates this tendency.
You are absolutely correct, a trader needs an increasingly robust and powerful system to make it on the lower time frames, as the spread rapidly becomes his worst enemy, especially if he/she is aiming for a very small profit per trade.
  • #180
  • Aug 7, 2011 3:57pm Aug 7, 2011 3:57pm
Quoting Custos
In theory this sounds good, but I give you an example. Let's assume you have 2 pips trading costs per trade (not unreasonable).

The 1 trade a day system:
(1 trade x 20 pips profit) - (1 trade x 2 pips trading costs) = 18 pips net profit.

The 10 trades a day system:
(10 trades x 4 pips profit) - (10 trades x 2 pips trading costs) = 20 pips net profit.

Now, with the 10 trades a day you just made 2 pips more profit than with the 1 trade a day. If the trading costs are higher with let's say 3 pips per trade you would make less than by just entering...
Wouldn't your $/pip value be higher for the 10 trades/day system in your example given same equity risk of say 2%. So 10 trades still more profitable in $ terms.
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