What does having an "edge" actually mean?

[nomore4s]

Continuing on from the discussion on the "Becoming competent at forex trading" thread.

I have noticed that having an edge is a statement that is thrown around quite a bit on trading forums but I have never really seen a comprehensive explanation of what an edge actually is. This is my take on it.

Most traders seem to relate an edge back to a statistical advantage due to a pattern, set up or trading method but to me a true edge runs deeper then that. IMO there are very few traders (especially ones who post on forums regularly) that have a true edge over the market - FrankD and Trembling Hand are two who come immediately to mind.

Having an true edge is everything from having a very strong understanding of how the market you trade moves, having strong trade setups with entry & exits triggers, risk, money & trade management, ability to manage watchlists and/or bring new opportunities to your attention, the ability to constantly optimise these factors and constantly adapt to current market conditions but most importantly the ability to be able to perform these tasks consistently over a long period of time.

It's all well and fine having a system or set up that has been back tested and forward tested until the cows come home thinking you have an edge but unless the trader has the ability to apply the system consistently during the right market conditions most traders will at best end up just treading water or at worst slowing bleeding to death.

Being a successful trader means being able to control and manage all these things over many different conditions for many years. This IMO is a true edge- the ability to beat the market consistently over a long period of time, or in other words being a complete trader who understands what makes traders profitable but most importantly can apply that understanding.

 

[Temjin]

I think you have touched the points quite extensively already.

Yes, an edge does not just confine itself to a trading system that exhibits positive expectancy based on past and recent results.

You have covered other aspects of an edge already. In my opinion, it should extend to the technology employed by the trader, such as the software they use, the broker they use, the reliability of the internet service you use, etc. All these also influences the ability of the trader to actually test, design and implement their systems.

A trader's financial/lifestyle circumstance should also be taken into an account. For example, a trader who is very reliance on the profit from his/her trading system will be more skeptical to psychological biases than a trader who has a much more relaxed financial position and only looks to build up his capital through compounding alone. A trader's lifestyle should also be taken into account. A stressful trader who has a mid-life crisis with his/her family, or with his colleagues/boss at work, will have a much harder time taking the full advantage of his trading system (even if it has a positive expectancy).

Health is also important in this regards.

Most traders tend to focus solely on the "trading strategy" alone but seem to neglect other aspects of their life that could negatively affect their edge. There is really so much more into what defines a trader's edge.

 

[Wysiwyg]

So far summarised.

Experience - the ball-park figure of 10000 hours.

Health - nutrition and exercise, not strapped to the chair all day or night.

Tools - fast and efficient trading and analysis software, reliable internet service connection and provider, quality data provider.

Self Assessment - mentally capable and attuned to the requirements of securities trading.

 

[Mr J]

I like your post. Edge simply means advantage, so we can apply that in quite a few ways when it comes to trading. The edge I've talked about is what I'd call a 'tactical' edge - the edge of specific trades, or trading strategies (positive ev). The edge you talk about is what I would call more of a 'strategic' edge. This isn't measured in trades, but the overall skill of a trader, though naturally a high strategic edge will lead to a solid tactical edge.. Would that be a fair assessment?

I think considering lifestyle is a little liberal. Anything psychological or financial I would also file under a strategic edge.

Resources would be an edge. Like Wysiwyg says, tools etc, but also data, information, access etc.

 

[motorway]

Edge simply means advantage

Only thing it can be !

But Advantage over what ?

Well ---Over what a significant group of others are doing or are not doing.

Buying Earlier
Buying Later
Selling Earlier
Selling Later

Buying at all or not
Being patient
Acting Quicker

What Ever
If it puts us at an advantage
Then it is an Edge

An Edge manifests itself working against
Those doing the opposite
at the wrong TIME
For the Wrong TIME

There is no Edge
unless someone ( proverbial someone )
is PAYING FOR IT...

But Not I think does it Have to be ZERO SUM
More like an ecosystem

Of liquidity Takers &
Liquidity providers
The interaction
of trend and mean reversion
nesting within each other

It is about finding a niche ( a real one )
in the game of overbought oversold
and Long term trends


motorway

 

[nomore4s]

I like your post. Edge simply means advantage, so we can apply that in quite a few ways when it comes to trading. The edge I've talked about is what I'd call a 'tactical' edge - the edge of specific trades, or trading strategies (positive ev). The edge you talk about is what I would call more of a 'strategic' edge. This isn't measured in trades, but the overall skill of a trader, though naturally a high strategic edge will lead to a solid tactical edge.. Would that be a fair assessment?

I think considering lifestyle is a little liberal. Anything psychological or financial I would also file under a strategic edge.

Resources would be an edge. Like Wysiwyg says, tools etc, but also data, information, access etc.

I agree that while I'm talking about an overall edge you can break each department down and try to find a small edge in each of the different areas which may help contribute to the overall edge.

I also think lifestyle is a bit liberal and I think tools is also a bit of a stretch as well.

Most traders once they get to a certain level will all be on par with the tools they are using imo, like most professions the thing separating the very best ad the rest is skill & application not equipment. Also different traders will have different needs an EOD traders requirements will be less critical & therefore different to someone who trades like TH. While tools are important I don't think they provide the edge to beat the market - but this is probably just splitting hairs.

 

[nomore4s]

I agree that while I'm talking about an overall edge you can break each department down and try to find a small edge in each of the different areas which may help contribute to the overall edge.

In saying this though, imo you need to having a good understanding of the overall scheme of things before trying to break things down.

This is where alot of newbies fail imo, trying to put the cart before the horse by not really understanding what makes a profitable trader. They put a bit of money management & a trade set up together and then think that's all there is to trading, problem is when market conditions change so does the p/l sheet.

 

[Wysiwyg]

While tools are important I don't think they provide the edge to beat the market - but this is probably just splitting hairs.

Yes I think you mean the `bells and whistles` don`t give an advantage. The advantage or `edge` is in (as tech/a emphasises) the application.

 

[lukeaye]

This is where alot of newbies fail imo, trying to put the cart before the horse by not really understanding what makes a profitable trader. They put a bit of money management & a trade set up together and then think that's all there is to trading, problem is when market conditions change so does the p/l sheet.

But wouldnt a good strategy never change no matter what your p/l sheet?

Like if im going into a trade(s), i know what i can lose, and i know what i can gain, so regardless my strategy never changes?

I did struggle with this concept alot. I found it hard to accept losses, even if they were little. The whole notion of accepting that im "wrong".

Like today, im in loss, but my exits have not been triggered, hard to keep them open, when i beleive the market will continue lower tomorrow, but then it may go up? Is this what you mean nomore4's?

 

[Wysiwyg]

But wouldnt a good strategy never change no matter what your p/l sheet?

There was a trader named Nizar that used to be on this forum that put in place a trend following strategy. He blogged his trades, providing spreadsheet information of profit and loss. The last time I viewed the blog the account was in deficit back in September last year as the markets were sliding south. The blog isn't open any longer from what I can see and I am wondering if the trend following strategy fell down during the market decline.
He was adamant the strategy was robust.

 

[lukeaye]

There was a trader named Nizar that used to be on this forum that put in place a trend following strategy. He blogged his trades, providing spreadsheet information of profit and loss. The last time I viewed the blog the account was in deficit back in September last year as the markets were sliding south. The blog isn't open any longer from what I can see and I am wondering if the trend following strategy fell down during the market decline.
He was adamant the strategy was robust.

So what he didnt have an exit strategy? Is that what your trying to say?

Just something really simple, If your strategy is buying weakness in a trend which you have defined to be a trend, then if your exit is triggered, you can't keep going into deficit? IF the trend changes your strategy doesnt have to change, just the direction of your positions?

 

[nomore4s]

But wouldnt a good strategy never change no matter what your p/l sheet?

Like if im going into a trade(s), i know what i can lose, and i know what i can gain, so regardless my strategy never changes?

This is not really a strategy, this is only money management.

What you trade, the type of set up you trade it with and when you trade it in the various cycles of the overall market is more of a strategy.

I did struggle with this concept alot. I found it hard to accept losses, even if they were little. The whole notion of accepting that im "wrong".

Like today, im in loss, but my exits have not been triggered, hard to keep them open, when i beleive the market will continue lower tomorrow, but then it may go up? Is this what you mean nomore4's?

Again this is money & trade management at work.

What I mean is during the last 9 months or so trading breakouts and various patterns like pennants & flags and then riding the trend higher has been very profitable but in the 12 months before that this strategy was cr@p. In the next 12 months it probably won't be as easy or anywhere near as profitable so you need to optimize your trading strategy to reflect this as the market conditions become clearer.

Part of the skill of being a trader is recognising these changing conditions and positioning yourself to take advantage of it, look back through the XAO thread and see how traders like TH identified quite early there was going to be a strong rally off the bottom and of course applied that knowledge to their trading. And then look at how many bailed 1/4-1/2 through the rally missing a massive opportunity to make money because they failed to identify the current market conditions and adjust their thinking & trading to what was in front of them. TH had an edge and managed to optimise his trading to suit the conditions because of it.

While it might be a bit early yet, there are signs the market conditions are changing, we might still probe higher from here but the effort that is required to push us forward is starting to take its toll imo. I think you will find that sooner rather then later a lot of the patterns that were providing good trades will start to fail more regularly.

 

[skyQuake]

It means you are eligible to call your losses a 'temporary drawdown' rather than a crap trade

 

[nomore4s]

So what he didnt have an exit strategy? Is that what your trying to say?

Just something really simple, If your strategy is buying weakness in a trend which you have defined to be a trend, then if your exit is triggered, you can't keep going into deficit? IF the trend changes your strategy doesnt have to change, just the direction of your positions?

Lukeaye,

Nizar had a exit strategy, his system was actually a mechanical weekly trend following system that he back & forward tested and had plenty of stats to say it was a robust system. Where nizar failed imo was he didn't recognise that the market conditions no longer suited his system and instead of turning it off and waiting for better conditions for that system he stubbornly continued to trade it.

If nizar had turned his system off & then back on even 6 months ago (not picking the exact bottom) he probably would of made a killing but as it is I'm not sure that he has made his drawdown back even with this massive rally we've had.

This is a perfect example of knowing when to trade certain strategies & systems - eg a weekly trend following system doesn't work well during a prolonged market crash. Even with strong money management and risk strategies built into his system nizar suffered massive drawdown that while not fatal (slowly bleeding to death) will take a long time to claw back but alot of people wouldn't have been able to trade that drawdown.

 

[nomore4s]

It means you are eligible to call your losses a 'temporary drawdown' rather than a crap trade

lol, how true.

 

[nomore4s]

Just something really simple, If your strategy is buying weakness in a trend which you have defined to be a trend, then if your exit is triggered, you can't keep going into deficit?

Not on that trade, but on the next 10 trades you will continue to lose if the strategy doesn't suit the market conditions.

IF the trend changes your strategy doesnt have to change, just the direction of your positions?

But then your strategy has changed.

 

[skc]

This is a perfect example of knowing when to trade certain strategies & systems - eg a weekly trend following system doesn't work well during a prolonged market crash. Even with strong money management and risk strategies built into his system nizar suffered massive drawdown that while not fatal (slowly bleeding to death) will take a long time to claw back but alot of people wouldn't have been able to trade that drawdown.

Wise words. I tried to say this in the discretionary vs mechanical trading system debate. There are "macro" discretionary decisions in any mechanical system. Namely switching it off!

Mr J put it quite eloquently in classifying "strategic" vs "tactical" edge. I call them "Trader edge" vs "System edge". You can buy "system edge", but you can only acquire "trader edge" through education, experience and may be intuition.

 

[nomore4s]

SKC imo intuition comes from education and experience.

 

[IFocus]

Not on that trade, but on the next 10 trades you will continue to lose if the strategy doesn't suit the market conditions.

The run down from Nov 2007 was a classic example where many were still thinking long or worrying about losses of being long instead of looking to short. Most missed the change in market conditions meant a change in trading method.

Same happened in the run down from the dot com to 2003.

Being able to understand when your method works and fails is critical IMHO

Good thread Nomores's I think you're on the money

 

[Wysiwyg]

So an edge is many things and unique to each successful trader. Only the successful trader can identify their exact `edge`.

Where nizar failed imo was he didn't recognise that the market conditions no longer suited his system and instead of turning it off and waiting for better conditions for that system he stubbornly continued to trade it.

I would say he handled the draw down as the system allowed for it. The logic escapes me of why keep trading it in all market conditions.