Edge

Greetings people.

I have been posting on this forum intermittently for roughly 3 years or so and one thing that always comes up as sacrosanct in the philosophy of the more experienced traders is the idea of finding a system with edge.

I may have come across as dismissive of this on the face of it because I believe that retail traders fall into the stratum of the most, technological, informational, collective professional experience, order-flow visibility, academically, financial and human resources deprived market participating speculators on the Forex scene.

Whereas I would associate ‘edge’ as the equivalent of a fortified USP over other participants. So I would like to ask you what you mean when you refer to edge in a trading system.

Well, here’s what you’ve actually said …

So I hope you’ll excuse the comment that “may have” appears to be putting it rather mildly.

I don’t really know what you mean by “fortified USP”, but it was clear from your comment above that you’re using the word “edge” with a [I]very[/I] different meaning from almost everyone else.

Like everyone else here and all the trading literature, courses, websites, discussions and everything else, as far as I’m aware, I mean it only in its objective, provable, mathematical sense of “[I]positive net expectation[/I]”.

A system has an “edge” over the market if it’s reliably and reproduceably verifiable both from backtesting and forward testing that its trades collectively have a [I]positive net expectation[/I], at level position-sizes. In other words, over a statistically significant number of trades, it reliably wins more from its winning trades than it loses from its losing trades. “Chasing losses” by increasing the stakes when losing doesn’t count: that’s just re-arranging the deckchairs on the Titanic. If it doesn’t have an edge without doing that, then it doesn’t have an edge at all. Not in the normal, everyday, established-context meaning of the word, anyway.

That’s all “edge” means, in this context: it’s something objective, quantitative and verifiable.

Thank you for posting. You’re right I wouldn’t classify that as edge because it seems too obvious that +Ve net expectation is what you’re ultimately looking for. I was associating edge in the business context of having a comparative advantage over other market participating speculators through one or multiple of the above mentioned areas in which we compete; that can create a sustainable advantage which enables your long term success.

For example a an ultra-low latency high frequency system might have an edge over less developed technology trading the same strategy, or I might have access to client order flow and can therefore clearly calculate the extent to which Cable might crash post Brexit.

Trading without your definition of edge would be like setting up a convenience store and selling all goods at cost price, without leaving anything for fixed, variable, ancillary costs or profit. or an online retailer buying something for £50 and selling it for £10 as their main business model; without any fancy tax breaks or clear-out, product turnover incentive or as a loss leading product to build customer base or footfall for higher margin products (Tesco - petrol, Shops - cigarettes): just their standard business model.

I also think edge expressed that way can be misleading; I have several EAs that work perfectly (with Edge) on one currency pair for a set back-tested period but blowout my account on another pair. In fact I have loads of such EAs gathering dust on the shelf (so to speak). But without really understanding at a granular level the circumstances that make the EA account balance accretive or a loser, i’m still just guessing at best.

You’re right in that a doubling your positions sizing on a -ve EV system won’t work, i.e making a super-martingale a sub-martingale, but with a +ve system the martingale can add value by discounting your losses and maximizing your profits. The problem with the new martingale research i’m dong is as mentioned in the previous paragraph, works with some pairs well, useless on other pairs.

I’m trying to find the ‘edge’ (using your definition) by identifying the market conditions under which the system is +ve = there must be a reason why USDCHF works well but GBPUSD doesn’t. or to analogise - I will still take the titanic, but stay sober and steer clear of anything remotely resembling an iceberg.

Yes - interesting: this would arouse my curiosity, too, I must admit.

I suspect (but don’t know nearly enough about it to pretend to justify my perspective, because I steer well clear of anything involving “automation”, comparative Luddite and skepchick that I am) that that might have something to do with the interactions between what’s programmed in and the underlying nature of the price-movements, over the relevant time-frames, of the specific pairs concerned: that the iceberg, in other words, within the frame of reference of what a specific programme will foreseeably encounter, as a probability function, takes widely differing time-periods to arrive, with different currency-pairs. Nicholas Nassim Taleb would doubtless have a [I]great[/I] deal to say on this subject, as well as being able to say it far more convincingly, impressively and articulately than I could ever claim to manage, myself. He calls it a “black swan” rather than an “iceberg”, but at least we’re all using aquatic metaphors!

argh the Black Swan and now Grey Swan events. I suppose it could be characterized like that…low probability maximum damage events.

I think I understand your point about the shifting/unforeseeable nature of the failure; and I think you’re right if the probability of losing on each trade is truly completely independent and random.

But I am hopeful, by the very fact of a difference in outcomes when using different pairs and the fact that comparing the strike rate of the last 100 trades on any one pair there is wild movement about the break-even strike rate, that:

  • it might be possible to measure, switch on and switch off the EA in periods of high performance and low
  • it might possible to understand why there are periods of high and low performance i.e. what is happening in the underlying market - how can i classify the high risk market type, how can i then predict and stay out the high risk market type or at least switch off at minimal losses.

And to be honest, I like the relative peace of mind not processing technical and fundamentals. It’s hard to calculate an edge by your defo when the human element comes into the equation. There are easier ways to make money reliably, when your at least 90% sure of what you’re doing: working in a hedge fund at least you have the resources and business edge and it’s not your money and your salary is high anyway.

Yes, indeed … and those grey swans are increasing in frequency as well as getting darker in hue (Taleb gives explanations for both of those phenomena).

Or you could just re-direct your effort, energy and time into learning price action, instead, and acquire that way (as so many others have done) a genuine level-stakes edge without [I]needing[/I] to [U]increase risk[/U] during a losing run?!

(Disclaimer: the above comment is intended cheekily/facetiously/entertainingly, not provocatively or disrespectfully!).

Sure, that’s also an option. But how do you work out the human element, tiredness, psychology etc…if I were looking at this like a business, I would not put my money there, there is no real long term definable advantage over other speculators that is tangible…unless you’re a superstar trader and if 5% a month is the top 1% then it all starts sounding a little well…tedious, there are easier ways to make money with more certainty; 5% is kinda low.

And on this occasion i’m not going to make the usual lifetime habit of half completing the research on an idea. If I can find a way to make it work, possibly by increasing the strike rate prob above the break-even or equilibrium point; great! I’ll post my results here and make the EA available free for anyone that wants it.

If it doesn’t work. On to the next research.

It depends what it’s 5% [B][U]of[/U][/B].

[B][U]If[/U][/B] you can genuinely make 5% per month steadily, without big risks and without big drawdowns, it’s [U][I]dead easy[/I][/U] - these days - to come up with as much trading capital as you want. [I]And hundreds of people are actually doing it[/I]. As we’ve recently discussed in another thread.

I started out with £2,000 (around $3,000, it was, back then - not a fortune). It had already taken me many years to develop a secure, genuine edge, but with that you can make a living. (Not from $3,000 obviously - you need the patience and discipline to build it up first. But hey - [B][U]nobody[/U][/B] makes money from trading without patience and discipline!).

Many people hugely [B][U]underestimate[/U][/B] what can be achieved slowly and consistently with minimal risk, and they dismiss 5% per month as kinda low … and paradoxically the impatience that that inspires also often encourages those same people to imagine that they can make far more money, far more quickly, by increasing the stakes during a losing run (in other words, ironically, hugely to [B][U]overestimate[/U][/B] what they can achieve [I]quickly[/I]! ).

But some people can’t/don’t/won’t develop the skill-set needed actually to make that few percent per month [I][U]reliably[/U][/I] without huge risks and big drawdowns, so they tell themselves that they have bigger fish to fry, and that 5% is kinda low, and that they’re much more interested in 25% per month.

And unfortunately there’s a whole industry “out there” only too happy to collude with them and foster that illusion that they can somehow make 25% per month. Which is what they want to hear, so they welcome that and will look only/mostly at short-cuts that have no underlying basis in reality.

And for all these and other reasons, those people are chasing a dream [I][U]when there’s no need to[/U][/I] (because funding is readily available to conservative, low-risk traders) and they [B]don’t[/B] go on, three or five or even ten years later, to make a good living as independent traders. So the huge irony is that “being in a hurry because 5% is kinda low” actually prevents them from getting to their destination [I][U]at all[/U][/I].

I’m “just saying”. :28:

Ok, let me see if i can smoke you out of your bunker there with some of my experiences.

Well using Martingale as an MM is one of over a 100 different approaches I have considered over the years in trading forex; I used to use the standard 1:1 RR and trade manually which did not work well, but back then I didn’t have the same programming skills, so was very limited to what I could physically do in between lectures and work + my doubling position sizing was entirely dependent i.e. I was doubling down on a trading approach that was not appropriate for the conditions of the market at that time; so probability of losing after having lost already was actually higher and definitely not even 50:50.

Please stop going on about martingale as if that’s my sole trading philosophy; I am investigating its potential use as an MM tool.

I have been trading now for quite awhile and achieving 5% return a month I can tell you is a peace of cake, an that is without doing any real or hard core technical and fundamental reviews; when you have been starring at a screen for so long you sometimes stumble across a situation in a currency pair where you just know intuitively what is going to happen next: because you have seen it so many times before.

In fact when I think about it, that is not edge at all by your definition. Your approach will [B]NOT[/B] work in all market conditions and types (no real edge), what your effectively doing is trying wait for the market conditions and types for which you think your approach will work and then getting in on the action. This happens time and time again with my EAs and has been the cause of my frustrations: it works perfectly in some conditions but then is useless in others.

That is not edge. even by your definition. You’re trying to scalp the good conditions for your setups, effectively. The irony of that with your critique of the Martingale MM is that that is precisely what I am trying to do but algorithmically: the overall strik rate of the random generated trades tends towards the equilibrium strike rate (neutral EV) in my case 28.57%, but in that journey there are periods where the strike rate is above or below that equilibrium value - which is equivalent to sitting it out or getting in when market conditions are right.

I kinda have other things I need to tend to and definitely cannot spend the next decade of my life trying to acquire funding for a 5% month return in a highly speculative business like retail trading. In fact the whole point of taking the algorithmic approach is to free up time to deal with other things… and trading based on technicals must be the most non-edge unreliable gambling I have ever come across - because you simply have no real clue what is happening in the market; where the orders are, you are riding the volatility created by orders you cannot see under the illusion that the witchcraft of drawing a few lines on the chart will somehow tell you what will happen next. For me having edge over retail and institutional traders in this circumstance would be having access to a majority of the market order flow (FX Market Making trader at Deutsche Bank for example).

The only saving grace that feeds this illusion is that your profit targets are minuet so once you hit one absorbing barrier or Limit, you stop gambling. and that feeds the illusion for a longer period. That is like me having a 40 step martingale and saying I just want to hit 1 profit trade per month. Or the fact that i have never lost playing black jack in a casino because I always make a run for the doors after getting into a little bit of profit.

Only long term trading based on the fundamentals can take retail fx from gambling to investing, with fundamentals you can actually realistically process all the variables that make a currency pair increase in value over time versus another and escape the noise of temporary volatility.

£100,000 a year salary + £250,000 bonus working in IBD versus risking my life savings for 3 ~ 5% a month. No income security and general derision by my contemporaries. Give me 2million bucks and ill give you 5% a month for the rest of your life.

Let take a math test question for dummies …

Task is Instead of give you 2 mill i will give you 10 k you make 5 % a month

so how long time will it take before 10 K become passing 1 mill ?

After 10 years with 10 k you will have 3,48 mill

What is the amount after 20 years ?..

Since 5 % a month is little for you skills let say 5 % a week 40 weeks trading a year is pice of cake for you !!!
So when When can i buy my privat private Airbus 380 to 220 mill pund…from my 10 K investment !!

Please don’t post on my thread again.

£10k @ 5% monthly account growth compounded monthly for a year; what does that yield.

10,000 * (1.05 ^ 12) = 17,959. i.e. 79.59% return

Buy a buy to let house for 100,000 using 10,000 as a deposit. 1 year later the property value has gone up 10%.

investment = 10,000 || return = 10,000 || total = 20,000 i.e. 100% return.

  • All the benefits of safety and peace of mind. Better use of money I think either scaling up or scaling down

buy a business with leverage - senior debt. using the company’s assets and income stream as collateral or LBO. improve the performance increase margins, market share, decrease cost etc…IPO the company in AIM or your domestic equivalent of the low cap companies market or sell to a private investor.

More involved but also more interesting than property. Still better results than gambling on the spot market. Unless of course you are genuinely a brilliant trader - even with all your disadvantages to other market participating speculators.

And 5% a month is not what I would consider brilliant.

[B]
Reason why you do not think 5 % a month is Brilliant is because you have a big black hole where the brain is located or more correctly math logic is placed …[/B]

everyone can make 5 %, 10 , 20 or 100 % a moths sometimes but not regular…

The brilliant is to make 5 % regularly month out month in … Period nothing to discuss , argue against telling you are an idiot …

…If i give lexys 10 K she promise me 5 % a month …after 205 months 17 year i can bay an Airbus 380 to 220 mil pound …

But i prefer to let you trading my 10 K , you promise me 5 % a week , so that mean i can bay my Airbus 380 after 3,9 year " 205 weeks " of course i do that ,

There’ll doubtless be a newer, better model out, 17 years later. The sky’s the limit, as they say!

Black hole where brain is, correct math logic. Sure.

Please refer to my previous post.