Having an edge: good or bad?

Beginner Questions
1

From what I have learned about trading until now, it seems everybody agree that one need to have an edge to be successfully in trading.

What exactly does it mean ? I could find two main interpretations of “having an edge” :

  1. to have an advantage over others
  2. to be better than anybody else in doing something

It is not very clear for me now what is the approach the majority of traders believe: 1 or 2.

If it is the case 1, meaning that someone has found a strategy that nobody or few ones are aware of, from my point of view keeping that strategy secret is counterproductive. The reason is obvious: how could that strategy be a good one, when nobody is willing to move the price in the conditions defined by that strategy? Simply because they don’t know about those conditions, only the founder knows about them.

That simply means that case 1 is impossible. Nobody could have a secret strategy simply because he or she depends on everybody being in agreement regarding the direction of the price movement.

I think the proper meaning of the edge is that of case 2. The edge means your own ability to be synchronized with a strategy, a kind of impedance match between a style of trading and your traits.

When the strategy matches your talents then you have an edge.

So it’s not about keeping secret your observations and findings. By contrary, make them well-known to everybody, especially to newbies, because you need some followers when you believe some setups trigger trades.

2

Hi, An Edge in Trading isnt either of those 2 definitions, An edge is Best described as a method that provides you with a better then Random outcome. (usually just barely better). when one places an order in the market one basically has 2 directions that price can continue from there. (50/50 odds. all other things being equal).

so an edge has to do with practices and plans that can provide you with more profits over time then losses. This can be achieved through System Development. A system is a repeatable method that brings an Expectancy of profit over time.

Thought i would point out issues in your 2 definitions based on the nature of trading as i understand it.

  1. Technically an edge would have an advantage over other people (those who have no edge at all). but its not more important to have a better edge then other people. as long as you have an Edge.
    on the surface your idea of needing everyone to be in agreement to go in at the same time, does make sense in fact i used to belief the same. since i have learnt that you need people not to want to go in at the same time as you, you need people to buy (or sell) after you, at a worse price then you. If that is the case you need a method that provides the result of getting in early.

  2. this is a better description then one because (again, most people don’t have any edge). but it still maintains that you need to have something over others. Also it implies that there are only a few or limited ways to be successful. Yes the market is a makeup of people. but because there are so many people and many many methods of trading, it is impossible to have only a couple of most effective methodologies. It is neither about having the most common or least common system in existence.

3

I would say that that’s a strategy not an edge.
If I can’t trade that strategy because of psychological inabilities, that means it wont be profitable for me at all, regardless the odds it provides. I need to find a strategy which best fit my beliefs, and that’s an edge.

For example some are good scalpers but lose if they try position trading and viceversa.
While scalping and position trading are both profitable trading strategies.

Why do you think every book tells to “find your edge”. I don’t think they are meaning to only find a method and that’s all.

Confusing the method (or system or strategy) with the edge is a dangerous approach. That’s why I even didn’t chose to enumerate it among the possible meanings.

Newbies could spent a lot of time trying to learn a system that they don’t like. Somebody needs to tell them there are more options for them.

4

Good one Paul. Agree here.

5

From ‘Trend Trading’ by (trading legend) Daryl Guppy:

“In a trend there is [B]not[/B] a 50/50 chance of prices moving up or down.
There is a 75% probability of the existing trend continuing. This trend
acceleration also increases the probability of a price ‘pop’ or 'bubble’
above the trend line. This is very important.”

That’s an edge.

6

I could draw an egg on my screen and then observe the relationship between the egg and the price. I can do statistics and observe something that has a 50/50 repeatability.

It is a very tradeable situation. You could draw anything you want on the screen, and if the market is really predictable, or has a structure , you could devise a rule that is tradeable.

From this point to having an edge there is a long way. Among the first steps you need to take is to define a risk/win ratio, then to establish a position sizing (money management) after that, 80% of the time you will spend to hone your psychological traits to be able to trade that situation.
How many of us are able to catch a trend even it has a 60% probability of continuation ? You know the answer: 5%.

That’s my idea of an edge. It might be just an issue of definition, so you may be right as well.

7

Look for set ups that will go in the direction of the trend. when momentum is on your side, at the beginning of an up or down cycle, verify with support and resistance and verify on at least 2 time frames

8

Ok, I do all the verifications and after that I am to afraid to enter. Or maybe another indication shows me that a quick sellof is at stake. Or maybe I am just before a NFP, and I don’t realize. Sounds familiar ?

The fact is you tend to be married with your initial belief that a trend is going to develop. If you are not well trained , your field of perceptions is drastically narrowed to your initial belief.

It takes years of drills to enlarge your perceptions to see all the facts the market is presenting to you. Then you will have an edge.

From the begining your statement is wrong: “]Look for set ups that will go in the direction of the trend”. You have the bias to look for setups that confirm your belief, and dismiss all that is against you.

9

O-Okay thanks for the help. I will work on that

10

Lol, I didn’t mean to hurt anyone. I am just amazed how easy people think that if they know a method, this alone will bring them profit.

11

What amazes me is when I see someone who has all the answers. First off, the reason it’s not clear for you is because both assumptions 1 and 2 are wrong when it comes to trading your edge doesn’t have anything to do with people. Method, Money Management and Mindset is what gives you the edge in trading.
But no problem good luck with your trading

12

Wow, that’s what I am keep saying. But you, not far than few posts away said that only the method is the edge. Make up your mind.

How come mindset doesn’t have anything to do with people ? Whom mindset then ?
Your mindset must be much better that others people mindset. That’s an edge.

13

So… Why are you so worry about " mindset" of other people. Having mindset alone won’t give you an edge. You need a method/system/strategies that have been tested, experiences, knowledge and don’t forget the Ego…that should give you an edge in general…

14

I think people get overly hung up on this mythical ‘edge’. An edge isn’t a thing, it’s a term for whatever one uses to keep winning at anything they attempt.

Quit worrying about whether an edge is a good or a bad thing and just concentrate on improving your trading, that would be my advice - anyone trading well can then approach life as they please, including patting themselves on the back for their amazing edge, if that’s what floats their boat.

15

I assume this is in reply to my first message. I think you are referring to “Strategy”, as a set of rules. an entry signal… this isn’t all there is to a Strategy or Edge… again an Edge is best that results in Profitable and repeatable results… This could and should include the psychological preparation to trade with confidence and consistancy.

Your telling me not to confuse Strategy with Edge. what is an Edge for you? it occurs to me that your asking if you think an edge is good or bad. so that means you must have a set definition of what an edge is?

To be honest you seem full of answers. so why the Question?

16

I’m not really clear what you mean by mindset, do you mean discipline, positive mental attitude, or the intellectual capability to develop an edge ? Or something else ?

There’s no easy answer to this edge question. At the simplest level, you could argue that a method either had an edge, or it didn’t, but you can only really say that with the benefit of hindsight. I’m sure that most people with a bit of technical ability could get some market data, and design a strategy that works based on some optimized parameters for some particular market. Does that system have an edge ? Well it did for anyone who traded it using a similar system at the time !

You can design a system with a negative edge, randomly open a trade, and close it immediately. There you have a perfect example of a system with negative expectancy, and it’ll always certainly have a negative expectancy.

Likewise you can have methods that have an appearing edge for some people. A good example might be a technical system used by a bunch of guys on various timeframes and instruments. Some do great, some not so great, but is that an edge, or just random chance ?

You can design a method with an edge, but the edge only exists as long as the basis on which the edge is based still holds. For example a decade ago I designed a method to profit from interest rate differentials. It continued to work until interest rates changed, then it stopped working. Did it have an edge ?

So I’m going to argue that mechanically, methods can have edges, but those edges are possibly transient, although I do know discretionary technical traders who have successfully traded the same technical set ups for over a decade, but I doubt those approaches could be automated or traded purely mechanically

Money Managements a bit of a strange beast too, particularly when you start considering staking plans because again, some of these things lend themselves to curve fitting. People will argue that it’s not possible to profit simply by applying money management techniques to a zero or negative expectancy system, and strictly speaking, I’m in agreement. What is almost certainly true is its possible to destroy a perfectly good profitable system by the application of incorrect money management, but once again, you only get to find that out in retrospect.

Mindset or psychology is pretty much the same. There’s a famous experiment that was conducted where no traders where asked to participate in a trading simulation. The simulation had a 60 percent win rate with 1:1 risk reward. An adequately funded chimpanzee should be able to profit from that system, and a half decent trader could make a fortune, but of course practically all participants in the experiment lost money

So again, psychology can destroy an edge

I suppose the question is can psychology give you an edge ? Will having a positive mental attitude give you an edge ?. The answer has to be no, will following a system with a negative expectancy give you an edge if you are disciplined ? Again the answers no. Having said that, I’d argue that psychology plays a part in all aspects of a traders development. It effects the types of strategy that they are drawn to, it effects how much research they are likely to undertake, how much testing, the thoroughness of that testing, their approach to absolutely every single aspect of system design, how much risk they take, ability to withstand drawdowns, their ability to accept variance in results etc etc.

In summary, I believe that the slightest deficiency in method, position sizing or ability to execute a method is going to cause people a world of pain, the slightest problem or weakness leads to potential disaster. Once all of that stuffs under control, it’s about understanding the theoretical inefficiency your trying to exploit, monitoring to ensure that the edge still holds, and a decent run of luck to exploit that opportunity whilst it’s still there.