Trading Edge: Definition

[janus 10]

People use the term, 'Trading Edge' in phrases like 'what is your edge?', 'Find your edge' etc.

 

I haven't come across a precise definition of 'Edge' in the context of Trading.

I would like to hear your definition of 'trading edge', preferably with some examples.

 

-Janus

[jonbig04 10]

Edge is just a general term used to describe the fact of positive expectancy, eg. a statistical advantage.

 

Casinos make large profits because all their games have a built in mathematical edge on their side. Over the long term they will make more money than they lose. Period. If you don't have an edge (long term mathematical advantage) the best you can hope to do is break even. In trading though you won't even get that far because the odds are stacked against you to begin with (commish, slippage, emotions). Without an advantage you will lose money slowly, or all at once.

 

In the context of trading most people's edge is a system that they have tested an defined rigorously and have found to make them more money than they lose, giving them the advantage. This could be based on price action, canned indicators, fib numbers, phases of the moon, or their astrological sign...as long as it gives them a positive expectancy over the long term (yielding profit), its an edge.

[brownsfan019 17]

For me, edge as applied to trading is something that separates the winners from the losers. Since I trade futures and they are a zero sum game, there's always winners and losers. Your edge is what puts you into 1 of the 2 groups.

 

As for what the edge is, as the above post says, it can be anything from indicators, tape reading, support/resistance, money management, risk management, etc etc.

 

IMO the real edge is HOW a trader uses whatever tools they have at their disposal to make money. It's amazing how you can present the same chart to 10 traders and get 10 different views on how to trade it. That's the beauty of the markets, some will be right, some will be wrong; the edge goes to those that can be right more than they are wrong.

[BlowFish 10]

And the wacky thing you could be long I could be short yet we could both be winners.....or losers for that matter.

 

That's the beauty of the markets, some will be right, some will be wrong;

[Sledge 13]

Edge is just a general term used to describe the fact of positive expectancy, eg. a statistical advantage.

 

Casinos make large profits because all their games have a built in mathematical edge on their side. Over the long term they will make more money than they lose. Period. If you don't have an edge (long term mathematical advantage) the best you can hope to do is break even. In trading though you won't even get that far because the odds are stacked against you to begin with (commish, slippage, emotions). Without an advantage you will lose money slowly, or all at once.

 

In the context of trading most people's edge is a system that they have tested an defined rigorously and have found to make them more money than they lose, giving them the advantage. This could be based on price action, canned indicators, fib numbers, phases of the moon, or their astrological sign...as long as it gives them a positive expectancy over the long term (yielding profit), its an edge.

 

Very well put definition of "Edge!"

[AgeKay 10]

Edge is just a general term used to describe the fact of positive expectancy, eg. a statistical advantage.

 

Casinos make large profits because all their games have a built in mathematical edge on their side. Over the long term they will make more money than they lose. Period. If you don't have an edge (long term mathematical advantage) the best you can hope to do is break even. In trading though you won't even get that far because the odds are stacked against you to begin with (commish, slippage, emotions). Without an advantage you will lose money slowly, or all at once.

 

In the context of trading most people's edge is a system that they have tested an defined rigorously and have found to make them more money than they lose, giving them the advantage. This could be based on price action, canned indicators, fib numbers, phases of the moon, or their astrological sign...as long as it gives them a positive expectancy over the long term (yielding profit), its an edge.

 

The problem with 'edge' in trading is that you don't know you have one. The casinos know they have an edge because it is set in stone mathematically, but in trading you can only quantify your edge after the fact. You have an edge if you can consistently make money trading, and you obviously don't have one when you're losing money. The problem with that is that there might be more reasons to you losing money then not having an edge, which makes it even harder to quantify your edge. Even if you do think you have an edge, it might change or go away since the market is dynamic while the casinos edge is constant and never goes away.

[Sledge 13]

The problem with 'edge' in trading is that you don't know you have one. The casinos know they have an edge because it is set in stone mathematically, but in trading you can only quantify your edge after the fact. You have an edge if you can consistently make money trading, and you obviously don't have one when you're losing money. The problem with that is that there might be more reasons to you losing money then not having an edge, which makes it even harder to quantify your edge. Even if you do think you have an edge, it might change or go away since the market is dynamic while the casinos edge is constant and never goes away.

 

I believe you can indeed know that you possess an edge. Casinos know they have an edge and as you said mathmatically, they have their edge- but psychology wise- traders can have their edge. As Casinos know their are only 52 cards in the deck, good traders know that fear and greed of other traders will come into play. If a trader learns to read the other players moves- it most certainly gives you an edge.

 

Knowing how the masses move, how they tend to think and the overriding emotions of fear and greed in the marketplace- they are a distinct advantage over someone who is unaware of what really drives the markets.

 

My .02

Aaron

[ammo 10]

if you pick a few indicators and use them over and over you will notice correlations between the indicator and the markets reaction to it,that doesn't mean you will always know what the market is doing,but occassionally the market will follow your assumption based on that indicator and you will profit from it. One trader who gives a heads up on his trades and why he takes them uses the macd and 5 or 6 times a day he will take a few points out of the market. He uses divergence when the macd is making a mountain above zero and then a second smalller mountain . When the market is trending up and the mountains are going down he feels confident in selling it when the 2,3 and 5 minute chart lines are crossing over,that gives him an edge,the other thing he does is hold steadfast to a 2 or 3 point stop rule,if he gets stopped out and he still likes the trade he will reenter,but he never takes a big loss,i admire his discipline. That doesn't always set up but when it does he takes advantage of that edge

[Guest forsearch]

When the market is trending up and the mountains are going down he feels confident in selling it when the 2,3 and 5 minute chart lines are crossing over,that gives him an edge,

 

Having problems visualizing this. Are these on the same chart? Or three different charts?

[ammo 10]

i;ve never seen his trading platform but he watches several time frames,he uses a weekly to get a trend and then reduces it to a daily ,hourly,30 min,10,5 ,3 ,2 min,i use different indicators,his was just easy to explain, if you put 4 charts of the es on your screen all using different time frames with the same macd indicator,it should be easy to watch

[Guest forsearch]

Got it now. Thanks.

[Eiger 10]

I find this fascinating. Here is why: This is a post on trading edge posted in the psychology section, but there is no discussion on trading psychology! All the discussion is about stats, expectancies, and technical indicators. Surely these are an essential part of an edge. Do you all think this is sufficient? More to the point, if you think there are psychological edges, what are they? What have you all found useful from psychological perspective that has made the difference in your trading?

[Nvesta81 10]

I find this fascinating. Here is why: This is a post on trading edge posted in the psychology section, but there is no discussion on trading psychology! All the discussion is about stats, expectancies, and technical indicators. Surely these are an essential part of an edge. Do you all think this is sufficient? More to the point, if you think there are psychological edges, what are they? What have you all found useful from psychological perspective that has made the difference in your trading?

 

I have yet to become consistently profitable but I will say that some areas of psychology have definitely made a difference in not losing everything I have already.

 

Some areas in particular:

 

1)having the patience to only enter a trade at the proper moment, and having the discipline to eliminate impulse trades.

 

2)being able to control the urge to trade larger size -- not being greedy.

 

3)knowing when to stop trading and then evaluating my strategy.

[jonbig04 10]

I find this fascinating. Here is why: This is a post on trading edge posted in the psychology section, but there is no discussion on trading psychology! All the discussion is about stats, expectancies, and technical indicators. Surely these are an essential part of an edge. Do you all think this is sufficient? More to the point, if you think there are psychological edges, what are they? What have you all found useful from psychological perspective that has made the difference in your trading?

 

 

Because we all had a lengthy discussion on that exact subject not too long ago. That's why I haven't mentioned it anyway.

[ammo 10]

do you or have you known anyone who has visited a shrink thinking that would help and they continue seeing the shrink for 2 or 3 years,maybe it was a bad shrink but most likely the person had trouble changing there ways,it would be possible to teach that person how to drive a car without their changing their mental habits,same in trading,changing your personal life is very hard and very few can change, the thing that is hardest to see is the personal changes necessary to move forward ,most spend their time changing the mechanics of trading,it's no different than real life,the core problem seldom changes, those problems are deeply imbedded human weaknesses which will always seem to repeat history,or do you believe in world peace

[Frank 10]

I think trading edge derives from market makers.

 

A market maker buys on the bid and sells on the offer, the spread is roughly his edge. My friend is an option market maker. In this case, he sits on a relatively wide bid/ask spread and a customer hits his bid with an order -- he instantly hedges that position by trading an appropriate amount of stock to offset this position. The difference is therefore, the fact that he sold on the bid -- a price he has calculated to be a discount to the cost of hedging.

 

In regular market making, your edge is less tangible. A casino knows his edge because the game has mathematical properties where 'past does in fact equal future.' In regular trading, you never know if future will be different than the past -- so any mathematical model may be optimized to one set of past rules -- where a new set of rules may have instead been created.

 

That said, there is much literature on this subject in portfolio management. Instead of 'edge' --- you think of 'reward/risk'. Reward and risk are estimated and ratios are created to summarize/describe different strategies. Many different strategies have proven to be uncorrelated over time such that 'reward/risk' on average can be estimated with reasonable accuracy for a properly diversified portfolio.

[minoo 11]

My definition of Trading Edge

 

'When one is consistent part of one's own Trading System'

 

System are as good as the weakest link within it & most of the time I find myself as the weakest link

 

The period I could maintain Edge is limited (< 40 minutes Ave) and hence split trading sessions 2 to 3 times a day to play with it

[Guest forsearch]

Speaking of edge, here's a link to a FREE webinar about "Creating Positive Trading Statistics - Learn how to Trade with an Edge!" today (Thurs 8/21/08) at 4:30pm US ET

 

http://tinyurl.com/5a48p2

 

Below is the blurb from the broker's e-mail about it:

 

A trader can create a positive equity curve via a positive average win to average loss ratio, high winning trade percentage or a combination of multiple key statistics.

 

In this live webinar, the host teaches a methodology that quantifies the statistics necessary to create consistency in any market condition based solely on price action.

 

You will learn about the variables in a statistical trading methodology, including:

 

* Properly calculating risk - reward ratios

* Understanding the profile of your trade set up

* Powerful reversal pattern used extensively in proprietary trading

* Understanding the synergy between their key trading statistics

* Discussion of the critical variables

 

DISCLAIMER: I have no affiliation with either the vendor or the broker... I'm just another trader who gets inundated with e-mails like this on a daily basis, and figured this might be worth it for someone reading this topic.

 

-fs

[jonbig04 10]

In my opinion one of the keys to success (I wouldnt know) in trading or anything else is behavior modification.

[Sledge 13]

In my opinion one of the keys to success (I wouldnt know) in trading or anything else is behavior modification.

 

That is very true. Being in control of all your emotions is key in trading the market.

 

Perfect Example. You perform your technical analysis and you have your "trigger" that you have waited to see for hours (patience) You are now in the trade and are Long at say 1.5000. Your analysis forecasts you to look for exhaustion and possible closing out at 1.5100 for simplicity sake.

 

So the trade begins, it immediately goes up 10 pips, you are thinking "good" no problem, then you get 20 pips.. good good, but then it drops back to 10 (Fear of + trade turning negative) you start to panic a bit. You open your manual close and are finger on the mouse. It heads back to 20 pips up "Whew" you think. Then it goes to 30 and you think "Good"

 

We then get to it being up 75 pips and a stall. You are +75 Pips but are shooting for a hundred. Greed is present in the mind for the 100 pips, and fear is there for 0 pips. And the battle begins hard. Do you close out? Do you band money and be happy? Do you let it go and have faith in your analysis? Or are you so blind that you SWEAR you'll get the 100 pips, but the market is telling you "Hey buddy.. 75 is all we got right now- take it or lose it!"

 

These are the things that matter most- these emotions to learn to "keep in check"

Aaron

[Fibone 10]

My own definition of a trading edge is a mixture of technical skills and psychology.

 

1. Knowing yourself ie identifying your strengths and weaknesses;

2. A logical and flexible trading method(s) suited to your own personality and written down;

3. Intelligent position sizing;

4. Maximising profits as much as possible;

5. Minimising losses and risk as much as possible;

6. Discipline to follow your trading plan; and

7. Patience to wait for the very best setups.

 

Should lead to a trading edge ie positive expectancy.

[jonbig04 10]

That is very true. Being in control of all your emotions is key in trading the market.

 

Perfect Example. You perform your technical analysis and you have your "trigger" that you have waited to see for hours (patience) You are now in the trade and are Long at say 1.5000. Your analysis forecasts you to look for exhaustion and possible closing out at 1.5100 for simplicity sake.

 

So the trade begins, it immediately goes up 10 pips, you are thinking "good" no problem, then you get 20 pips.. good good, but then it drops back to 10 (Fear of + trade turning negative) you start to panic a bit. You open your manual close and are finger on the mouse. It heads back to 20 pips up "Whew" you think. Then it goes to 30 and you think "Good"

 

We then get to it being up 75 pips and a stall. You are +75 Pips but are shooting for a hundred. Greed is present in the mind for the 100 pips, and fear is there for 0 pips. And the battle begins hard. Do you close out? Do you band money and be happy? Do you let it go and have faith in your analysis? Or are you so blind that you SWEAR you'll get the 100 pips, but the market is telling you "Hey buddy.. 75 is all we got right now- take it or lose it!"

 

These are the things that matter most- these emotions to learn to "keep in check"

Aaron

 

 

 

It's crazy how quickly those emotions come into play. Even when you expect them, its difficult not to succumb.

 

IMHO, If you want to do something truly worth a great effort, you are not going to be equipped with everything you need to succeed at it. You will have to mold yourself into what it takes so be successful at any given venture. Just like an running-back building up his leg muscles. He also may have had to build up his confidence to perform under pressure or whatever. Behavior modification. Modifying yourself into what you need to become to win. Thats what its all about, I think.

[DbPhoenix 42]

To the OP:

 

An edge is the knowledge proved through research that a particular price pattern or market behavior offers an acceptable level of predictability and risk to reward to provide a consistently profitable outcome over time.

 

If, as I said in the previous thread, one does not have evidence of a consistently profitable trading strategy, then his problem is not "psychology". It is not "discipline". It is not ego or greed or fear. His problem is that he doesn't have a consistently profitable trading strategy. Until he does, he can be mental health poster child with the strictest discipline on the planet and he won't be profitable. He has to have a consistently profitable trading strategy.

[jonbig04 10]

Thats a good example. IMHO: Developing that trading strategy is going to be difficult (at least it is for me). It will require you to look at chart after chart, read constantly and then test what you find, only to realize you were all wrong and now have to start over.

 

Most people won't, or don't want to do this.

 

Most people want to simply jump in and trade. That would surely wipe you out. Therefor if you're not disciplined enough to do the work and come up with the strategy, you won't make it. You have to modify your behavior into what will work. You have to make yourself into the kind of person who sits down and creates a proven and tested method. This may only be true for me, but I'm not the kind of person who likes to sit and analyze charts as the market hours go by. I want to be in the market, hands on. However I've realized from DB and other traders that this will not work. I'm therefor changing myself into what I need to become to be a good trader and right now what I need to become is someone who sits down and creates a method that works. That's what I mean about behavior modification, and I'm sure this won't be the only way in which I have to change myself.

[Bearbull 10]

From an interview with B, Steenbarger in the latest Traders mag (http://www.traders-mag.com) , Sept, 2008

 

Q: It's said that most traders effectively lose money. What are they doing wrong?

 

Steenbarger: Most traders put their capital at risk before they have developed the necessary knowledge and skills to accurately read shifts in supply and demand in their markets. They don't truly have an edge in their trading, instead relying on superficial indicators of market direction. With the costs associated with equipment, software, brokerage fees, and slippage - and absence of quality training programmes and information networks- it's not surprising that so many individuals traders fail.