From Random Trading to Building an Edge

[Fa_rees]

@playingmarkets

I am trying to wrap my head around the full implications of this statement:

@chesterjohn

Your stop loss is 5 times bigger than your tp. That means that assuming the market are random, you should win 5/6 trades and lose 1/6. You’re doing worse, which is why you lose money.

With that ratio, you need to win 90% of the time to have a meaningful system

Mathetically:

If your risk:reward (5:1) and loss:win (1:5) ratios are reciprocal values, it’s a break-even system (less fees/auxilary costs) with a profit factor of 1.

Therefore:

If you can repeatably achieve a higher win:loss ratio than risk:reward ratio, you have a profitable system.

My question:

At what point does a profitable system become an edge? (And did I get the first part right?)

You’re mostly on the right track, and I like how you’re thinking critically about risk:reward vs. win rate.

Now, where it gets interesting is your last question: When does a profitable system become an edge?

A profitable system just means over time you’re making more than you’re losing. But an edge implies consistency, repeatability.

A profitable system becomes an edge when you can clearly define the logic behind why it should work ,repeat the setup over many trades with similar conditions,and stay profitable across changing market conditions.