The 'Edge'

timsk

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If you think this is a thread about the U2 band member, then I'm afraid you're in completely the wrong place. :cheesy:

An off the cuff remark by Roberto on the 'Why do we do This'? thread got me thinking. He said: "You need a genuine edge and the intellect to apply it; that's all". This is something that I suspect most traders would agree with and, if they questioned it at all, it would be the bit about the need for intellect rather than a need for an edge. I certainly hope so, anyway! Unquestionably, everyone talks about the need for an 'edge'.

The purpose of this thread then is threefold:
1. Can we agree on a definition of what an 'edge' means - what does an edge constitute?
2. How does the trader without an edge find one, create one or do whatever is necessary to get one?
3. Having defined what an 'edge' means to you and having decided what your edge is, what role or prominence should the 'edge' be given within a balanced and well crafted trading plan?

'I Still Haven't Found What I'm Looking For . . . '
Tim.
 
"Edge" ..............A margin of superiority; an advantage: a slight edge over the opposition.
 
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You see, he has just explained it to you. I could not have done it better myself.
 
timsk said:
If you think this is a thread about the U2 band member, then I'm afraid you're in completely the wrong place. :cheesy:

An off the cuff remark by Roberto on the 'Why do we do This'? thread got me thinking. He said: "You need a genuine edge and the intellect to apply it; that's all". This is something that I suspect most traders would agree with and, if they questioned it at all, it would be the bit about the need for intellect rather than a need for an edge. I certainly hope so, anyway! Unquestionably, everyone talks about the need for an 'edge'.

The purpose of this thread then is threefold:
1. Can we agree on a definition of what an 'edge' means - what does an edge constitute?
2. How does the trader without an edge find one, create one or do whatever is necessary to get one?
3. Having defined what an 'edge' means to you and having decided what your edge is, what role or prominence should the 'edge' be given within a balanced and well crafted trading plan?

'I Still Haven't Found What I'm Looking For . . . '
Tim.


Your edge is a consistently profitable trading strategy. And there are a near-infinite number of consistently profitable trading strategies. All you have to do is find the right one for you. But you can't do that until you decide exactly why you're trading and what it is you want from the market. Without that, you'll just drift from Fib to Ross Hooks to CANSLIM to discounted cash flow.

As for your third question, the edge is everything. Without it, one is just "playing" the market in order to have something to talk about on message boards . . . :)
 
dbphoenix said:
Your edge is a consistently profitable trading strategy. And there are a near-infinite number of consistently profitable trading strategies.
:)

Would you post some of those consistently profitable trading strategies ? If it is profitable it will be well suited for me therefore it can be for any market .
Thanks in advance,
 
ottos said:
Would you post some of those consistently profitable trading strategies ? If it is profitable it will be well suited for me therefore it can be for any market .
Thanks in advance,

Check the Styles and Strategies Forum. There are loads of ideas there. You'll most likely have to modify what you find in order to make it fit, but there are no hidden secrets, just hard work.

I'll repeat, though, that your search will likely turn up zip unless you first decide exactly why you're trading and what it is that you want from the market. If you don't know what you want, you won't know what to look for.
 
answers-

1. a lot of money
2. a lot of money
3. a lot of money

each time the amount of money increases significantly.
 
Your edge is your Method.

An edge in trading is a method of picking an entry and/or exit from the markets that is better (ie more profitable) than randomly entering or exiting the market.

Some edges can be mathematically proven to be profitable others can be demonstated by rigourous
backtesting, some are just intuitive (chart reading/tape reading/level II etc).

Elder splits trading into three categories Mind, Money (Management) & Method.

You have all three sorted if you want to succeed in the markets. Although your mind probably has to
be sorted first as you wont be able to define your Money management rules or to even correctly
discover a proper Method if your Mind hasnt been tuned properly.

Trading with the trend is an obvious edge, a novice trader tends to trade counter trend, this
effectively gives them a negative edge (worse than random performance).
 
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donaldduke said:
Your edge is your Method. An edge in trading is a method of picking an entry and/or exit from the markets that is better (ie more profitable) than randomly entering or exiting the market.

Trading with the trend is an obvious edge, a novice trader tends to trade counter trend, this
effectively gives them a negative edge (worse than random performance).

I agree with the essence of what you say although I hope your edge is much better than your random choices. I find it interesting that this is my edge (primarily microtrends) but it is also the edge where people classically fail. They either have:
  • too tight a stop (not willing to let it chop a little because they are scared to give up money)
  • no stop (not willing to admit that the edge is not perfect and needs a "wrong" point)
  • too quick an exit (scared to give up profits that they have showing now)

To make an edge really work it has to be very clearly defined (if A happens then I will do B) during the stage while a trader is learning to trade consistently. Once consistent then the rules can potentially be relaxed as unexplored emotions play a smaller part in ones trading.

I think dbPhoenix suggested that if the plan (edge) was good enough then the psychological issues would not be overwhelming. Personally I found it hard to follow my (good) plan initially even though I think that I am relatively sane. I had to use lots of devices to fool my mind into focusing on following the process rather than it's intuitive understanding of how to make the most money.
 
dbphoenix said:
.....But you can't do that until you decide exactly why you're trading and what it is you want from the market. .......

Db, how specific do you think a person needs to be about this? Here are some examples from general to nitpickish. At what point on the scale does further refinement become useless:


  1. I want to make a lot of money
  2. I want to make my living as a trader
  3. I want to make $xxx,xxx,xxxx. per year
  4. I want to make $xxx,xxx,xxx. dollars per year with a minimum drawdown of x,xxx.
  5. I want to do all of item 4, in no more than 6 hours per day of trading
  6. On monday -Friday (excepting Thursdays)
  7. While trading a 15 min chart on the QQQ's
  8. using the ross hook (or fib, or whatever strategy)

And are these even the types of "why are you trading" questions you had in mind. - As I look over them, they look more like a "how and what" list, rather than a "why" list.

A "why" list might contain statements like:
I want to trade so that I can earn a better hourly wage, and spend more of my time doing x,
I want to trade because the markets intrigue me - and I need to solve the 'puzzle' of how and why and when they move.
I want to be a successful trader to prove to my exwife that I can earn more than she can.
I want to trade in addition to my regular job, so that I can build up a trust fund for my children's education..

Is this what you are getting at?

JO
 
IMO an edge can be quite simple but it must be consistent and work more times than not. If you do not have an edge you cannot make money, of that I am sure.
A few years ago I joined a large energy company with a team of traders and we got onto our first video conference with the two highly aggressive trading directors from New York. They went around the table and asked every individual what their edge was. We struggled to answer the question as it was not something we had really thought about or defined before that point. Since then I have been acutely aware of what my edge is in every risk I take. It was a very good lesson.
So what is edge?
For technicians it can be something to filter markets which are trending from those which are range bound or any other filter that on the whole works even simple support or resistance.
For commercials it can be just good fundamental information from people on the ground or brokers over drinks.
For Scalpers it can be the bid/ask spread.
So really it is anything that removes the random nature of throwing darts at the FT markets page.
I would reiterate that IMO if you don't have an edge you are just working on luck which is likely to run out at some point.
You will know that you have faith in your edge when you can fully accept that losing trades are a natural part of the overall trading process, if you cannot, then you probably do not have an edge that will work for you..
 
I like to think of an edge as a market inefficiency. If the markets were efficient then we wouldn't be able to exploit them. The inefficiency may come about due to either, human nature (eg crowd behaviour), or the market structure (ie how the market is traded, rules regulations, the structure of investment industry etc).

Identifying an edge will mean identifying the market inefficiency you're expoiting, although actually you may not know what the cause of the inefficiency is.

Market structures are always changing so edges based on them come and go. Edges based on human nature tend to be more consistant.

Any thoughts on this?
 
JumpOff said:
Db, how specific do you think a person needs to be about this? Here are some examples from general to nitpickish. At what point on the scale does further refinement become useless:


  1. I want to make a lot of money
  2. I want to make my living as a trader
  3. I want to make $xxx,xxx,xxxx. per year
  4. I want to make $xxx,xxx,xxx. dollars per year with a minimum drawdown of x,xxx.
  5. I want to do all of item 4, in no more than 6 hours per day of trading
  6. On monday -Friday (excepting Thursdays)
  7. While trading a 15 min chart on the QQQ's
  8. using the ross hook (or fib, or whatever strategy)

And are these even the types of "why are you trading" questions you had in mind. - As I look over them, they look more like a "how and what" list, rather than a "why" list.

A "why" list might contain statements like:
I want to trade so that I can earn a better hourly wage, and spend more of my time doing x,
I want to trade because the markets intrigue me - and I need to solve the 'puzzle' of how and why and when they move.
I want to be a successful trader to prove to my exwife that I can earn more than she can.
I want to trade in addition to my regular job, so that I can build up a trust fund for my children's education..

Is this what you are getting at?

JO


Some of it. Essentially the questions that I asked when you began your journal. Some of them can't be answered by someone who's just starting. Some can prompt only general answers at the beginnning but will prompt more specific answers as the beginner advances.

But even the rankest beginner knows whether or not he wants to make a living at it, trade only part time, trade for recreation, trade for the action, trade to have something to talk about with other traders (for whatever reason), trade only long enough to earn money to do or buy X. And it shouldn't take him long to figure out whether he wants to do it only in the morning or only in the afternoon or only on Tuesday, and later whether he wants to do it by scalping, swing trading, position trading, daytrading, EOD trading, via fundamentals or technicals and so on.

The beginner ought to know how patient he is. If he doesn't, he'll find out real quick. He ought to know how adventurous he is. Whether he's a leader or a follower (though most people probably think they're leaders). Whether he wants something "turnkey" or whether he'd rather create it himself. Whether or not he's a reader. Or if he learns better via seminars or webinars. He ought to know how he handles loss, how he handles "failure", how he behaves when things don't go as smoothly as he had expected (how one behaves as a trader is not that different from how one behaves in life: if you're a control freak in one, you're likely to be a control freak in the other, or a wimp, or a whiner, or a cowboy, or a dominatrix, or a Machiavelli).

Most people say they trade because they want to make money. But an awful lot of men trade because they want to show their fathers that they're not such losers after all, or the boys who always chose them last for games in school (quite a few women do it because they want to play with the boys; unfortunately, they often do a better job if they don't have the ego issues). Or it seems like more fun than Vegas.

Then there are one's characterizations of the market, which are essentially the same as those with which one approaches life: is a battle or a war? a competition? a game? a puzzle? Are you out to kill somebody? beat somebody? Or are you out only to detect the flow and slip into it, riding the waves as if you were sailing?

Again, not all of these questions can be answered at the beginning. But it should be clear that, unless one addresses them at some point in some way, to decide that one wants to trade CANSLIM or be a scalper simply because he'd been told or had read or heard that one could make a lot of money doing one or the other or some such would be ludicrous.

A trader once wrote that if you want self-enlightenment, you can go sit in a cave somewhere with a Buddhist guide for fifteen years, or you can trade S&P futures.
 
Positive or negative edge = a set of rules or behavior that set your trading results apart from random.

How to find one? Think of what could make you eligible for making above random results.
 
A trader once wrote that if you want self-enlightenment, you can go sit in a cave somewhere with a Buddhist guide for fifteen years, or you can trade S&P futures.[/QUOTE]

This is very true indeed, after all the trials and tribulations one goes through a mental shift takes place and the focus on why one trades can also change.
 
dbphoenix said:
Check the Styles and Strategies Forum. There are loads of ideas there. You'll most likely have to modify what you find in order to make it fit, but there are no hidden secrets, just hard work.

I'll repeat, though, that your search will likely turn up zip unless you first decide exactly why you're trading and what it is that you want from the market. If you don't know what you want, you won't know what to look for.

That's all fine and I agree with you, but all I wanted is couple of profitable strategies as a starting point , since you've mentioned you know lots of them.
 
ottos said:
That's all fine and I agree with you, but all I wanted is couple of profitable strategies as a starting point , since you've mentioned you know lots of them.

Piles. Start with the Darvas Box, the Ross Hook, and CANSLIM. One of these has a lengthy thread and one has its own forum.
 
Speaking of edges:

Going broke. Sad but common, I guess. Made good money during summer earnings season (lucky gambling). Borrowed more money (showed my records, earned some trust). Now I am heading to the south pole. The lender doesn't know yet but the moment is nearing. $3000 left. Making more mistakes because of the stress. Don't know what to do.
 
DB, take a break and play with a demo account until you get your confidence back. you can get nowhere operating out of fear.
 
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