1. Apologies for this brief post. I was becoming frustrated by the increasing complexities in the discussion about a topic, trading for profit, that is best kept simple and uncomplicated. The process is very simple, first we buy then we sell. Our goal as traders and investors is to earn profits that increase our capital over time. We can earn these profits either systematically or with luck. Relying on luck is a form of gambling and I'd rather discuss the systematic method of earning profit (ie. trading, investing).
2. My edge isn't just the probability of a winning trade. It includes both the probability of the wins and losses as well as the size of the wins and losses. My edge can be calculated on past results. I can identify the past market conditions and calculate my edge in the different conditions. The size of my edges vary greatly in the different market conditions. Knowing these stats allows me to risk more when the market conditions are favourable for a particular trading strategy.
3. I would agree with you that varying the amount at risk isn't an edge. It's not ony commonsense to increase the amount at risk when market conditions are favourable and the system edge is at it largest. Perhaps this is a skill learned from experience?
4. My edge is calculated from a past batch of trades and I know my edge in different market conditions. How do I apply this in the future? In the future, the edge becomes an expectancy and the size of this expectancy is unknown. It may even be negative for a while. It's my role as a trader to assess the current market conditions and to apply the appropriate trading strategy with the appropriate amount to risk in order to create my edge in the future.
Peter, you have gone from a very brief post, to a lengthy and complicated post that raises many issues.
1. Keeping it simple. Systematic as against luck. Buy then sell. For a profit. Over a time period (historical data and timeframe traded) and gambling.
Differentiating a systematic method from sheer luck, is, your edge. Do you have one? I agree simple is best. What exactly is simple? We have seen Mr Skate discuss any number of entry conditions and exit conditions to satisfy the criteria: buy then sell (for a profit). Is this simple or complicated?
The backdated test results suggest that it is profitable (as against the data tested). Is that 'test' an accurate representation moving forward? No-one really seems to know. Mechanical devotees seem to take it on faith that it will, possibly with a few tweaks after trading it forward in real time, represent an accurate model to trade.
Gambling takes many forms from professional to rank amateur. Trading (in my estimation) is gambling plain and simple. It just depends on how you approach it, which is what all the previous discussion on this thread addresses.
2. The 'edge'. Simply the single most important metric there is bar none. I'm not going to attempt to define it: at the end of the day arguing over definitions is pedantic. What I will do is use an analogy to show what a true edge is and it's inherent limitations.
Professional poker players play with an edge. They are odds makers and card counters first, psychologists second, playing the foibles of their opponents. They are still subjected to luck, in that the card they need or fear may appear.
Trading stocks is harder. The pack of cards = 52. The range of events that can impact your position(s) is wider/larger. Some traders believe that they can sense the psychology of the market, abstract as that is. Maybe yes, maybe no.
Your edge is that of or similar to the professional poker player, just not as defined. Different strategies involve different skills. This thread discusses essentially a buy stocks long strategy in exclusion. There are hundreds more strategies available. Risk arbitrage, event trading, earnings trading, bracket trading the open and many others.
Each strategy that is employed by traders in the markets has a specific edge, which can, impact your perceived edge. Hence an edge is or can be highly fluid. The more stable your edge, the more robust, the higher or more consistent will be your profits.
3. The amount of risk assumed.
The more robust your edge, the more risk that you can assume. However there are risks extrinsic to market positions: how robust is your brokerage? Many through the years have failed for any number of reasons. Currency risk is increasingly a 'thing'. What if the markets actually closed for a year or more? It's happened in the past.
4. Finding/developing your edge.
Of course no-one in their right mind will give you their edge. Markets are highly competitive. You will have to find/develop your own edge, while surviving the learning process. This will always involve competing against others that have more experience/knowledge/resources/etc than you.
Is there a holy grail?
Yes there is: it is finding/developing a true edge.
If your thing is buying stocks long, never confuse a bull market with an edge.
jog on
duc