Edge - what is it?

[Jaydee]

Edge, it must be the most overused and misunderstood word in whole of trading. So, what does it mean to you? How would you define it? I'm not questioning what your 'edge' is? I'm just wondering what the actual word itself means to you in the context of trading.

 

[UKtradergirl]

Edge, it must be the most overused and misunderstood word in whole of trading. So, what does it mean to you? How would you define it? I'm not questioning what your 'edge' is? I'm just wondering what the actual word itself means to you in the context of trading.

To me, an edge comes about when a method of trading produces a net positive outcome over a period of time which rules out as far as possible effects of randomness/luck. e.g. is profitable after paying commissions, etc after at least 1000 trades. This 'edge' must also come about with as little drawdown as possible.

There is some interesting info on this in the book 'way of the turtle' by curtis faith- a great read.

 

[foredog]

Entering the trade for a predefined reason, that (in theory at least) is more likely to show a profit rather than punting.

 

[new_trader]

Edge, it must be the most overused and misunderstood word in whole of trading. So, what does it mean to you? How would you define it? I'm not questioning what your 'edge' is? I'm just wondering what the actual word itself means to you in the context of trading.

An edge is applicable to any competitive activity, not only trading. To me, having an edge means possessing a quality and/or factor which gives you superiority over rivals, which is pretty much a dictionary definition.

 

[UKtradergirl]

Entering the trade for a predefined reason, that (in theory at least) is more likely to show a profit rather than punting.

Alternatively, i would define 'edge' as the place i get to emotionally when i have had a string of losses.

 

[porph]

I sell edge, only $2999 wire western union,,,,.

 

[foredog]

Alternatively, i would define 'edge' as the place i get to emotionally when i have had a string of losses.

just be careful when you're banging you're head against the wall that it's a flat bit and not an edge.....

(sorry to derail the post a bit)

Your edge should be like a casino's, they know that over time doing the same thing brings them a profit

 

[bbmac]

According to Mark Douglas (Trading In The Zone, The Disciplined Trader etc..) an edge is nothing more than '...a higher probability a particular outcome over any other.'

Relating this to a trading set-up that constitutes a trading edge, it will have been proven to produce a successful oucome over a meaningful sample of times it set up. This may mean that it achieved a successful outcome more times than not resulting in a net gain, or that it achieved an overall net gain across it's set-ups when combined with the appropriate risk:reward ratio.

 

[nine]

I think Mark is (deliberately?) oversimplifying bbmac; we all know that longer term trend followers frequently have edges that are profitable less than 50% of the time but return perhaps 3 times as much on a winner as on a loser.

I don't like newtrader's quality definition of an edge but I guess it is true because an edge to me is the key set of elements that allow one to trade profitably. At a mechanical level it would constitute the discovery of a setup that provides a potentially profitable entry and trade management rules that extract that profit. This could be a quality that a trader has for extracting dollars from momentum.

The mechanical edge often doesn't prove sufficient for trader profitability. On top of ones edge must be qualities such as discipline, patience, and courage.

 

[counter_violent]

If 1 bullet = 1 edge

Get a machine gun....you can't fail

 

[nine]

Ahhh ,,, the machine gun theory of trading ,,,

repeat after me:

Hello, My name is Counter Violent and I am an overtrader.
It is 10 minutes since I took my last trade. I do not seem to be becoming more profitable.


Seriously: most new traders need to work harder at the sniper approach to trading before stepping up to the heavy weapons. Waiting, disciplined, patient, for the prey to reach the perfect point then killing quickly and quietly for maximum profit.

 

[north5]

An edge is the ability to provide enough rational thought to overcome chance.

 

[kenobi]

i don't really understand why people keep on bringing out the topic.


to have an edge is when you know that what you are about to do is going to turn out in the way you expect it, day in day out

rather simple

 

[Jaydee]

Thanks for all the comments. It seems to me that we have two kinds of edge: the methodical edge and the executioner edge.

The former is based on the relationship between entries, exits, stops, position size, etc where over an infinite number of trades, the net result is that the trader returns a little bit extra over break even on average for each trade . The edge is, essentially, a statistical one where, if you were to look at the past trading history of the traders method, the calculation:

[(W x AW) - C] / |[(L x AL) - C]| > 1

Where:
W - number of winners
AW - average winner amount
C - trade cost
L - number of losers
AL - average loser amount

In short, the method has a positive expectation in the long run.

The latter, executioner edge, is based on the trader's ability to execute their method flawlessly and under emotional discipline, such that each trade is entered and exited at the optimal point based on the methodical edge.

Personally, I would be inclined to say that an 'Edge' literally means a 'positive expectation in the long run'.

 

[megamuel]

Edge = Something I don't have yet I'm on an edge quest

 

[Magos]

Thanks for all the comments. It seems to me that we have two kinds of edge: the methodical edge and the executioner edge.

The former is based on the relationship between entries, exits, stops, position size, etc where over an infinite number of trades, the net result is that the trader returns a little bit extra over break even on average for each trade . The edge is, essentially, a statistical one where if you were to look at the past trading history of the traders method the calculation:

[(W x AW) - C] / |[(L x AL) - C]| > 1

Where:
W - number of winners
AW - average winner amount
C - trade cost
L - number of losers
AL - average loser amount

In short, the method has a positive expectaion in the long run.

The latter, executioner edge, is based on the trader's ability to execute their method flawlessly and under emotional discipline, such that each trade is entered and exited at the optimal point based on the methodical edge.

Personally, I would be inclined to say that an 'Edge' literally means a 'positive expectation in the long run'.

I was going to write a simple answer, but since you took it to the next level I will need some time to think about it and will get you back to you for sure
Traders rock!

 

[oiltanker]

edge- having a billion in the bank.

 

[foredog]

edge- having a billion in the bank.

Which bank though, they might go over the edge!

 

[Magos]

Edge - what is it?
The following micro/macro-economic definitions are modified in order to apply to the Trading profession. Also insider information is excluded due to the fact of its illegal nature.
Edge can be defined as an advantage over an opponent in our case the financial market. The result should be constant win on any given trade.
For instance the future market is considered to be a zero sum game. Therefore there will always be a winner and a loser. For a trader to be a constant winner he must have a certain advantage over the other person: advantages can be split in the following categories:
(1) Competitive advantage: an advantage that a person has over its competitors. In terms of trading this will give a trader the change to identify market direction
(2) Absolute advantage: The ability of individual to produce more winning trades than any other in the financial sector
(3) Comparative advantage: a situation in which a trader can produce a trade with a low cost (but high margin) than a competitor
Trading also can be split in the following categories:
1. Scalping
2. Momentum trading
3. Technical trading
4. Fundamental trading
5. Swing trading
To make it more complicated I will introduce another category called talents:
Talent can be defined as the natural endowments of a person, a special person, which can be grouped in categories i.e. artistic, general intelligence or mental power. In my opinion is a person who has a certain skill which cannot be explained or understood 100%
A financial market is considered to by a dynamic market. The fundamental mechanism is based on the supply and demand, which is an economic model and describes the effects of the price and quantity in a market. The price is driven buyers and sellers. When you apply theory into practice you should stretch efficient-market hypothesis (EMH), this can be defined such as financial markets are informationally efficient, reflect all known information!
This is a good point to introduce behavoural finance: which is a psychological based theory to explain market anomalies (black swans). When information, market participants influence individual decisions the market outcome is not the same as a model would suggest.
Taking all the above into consideration:
To conclude edge in my understanding cannot be described as a mathematical formula or a model; it has to be more than that. It has to be a combination of things [see above categories] or it can come naturally.

 

[BSD]

an 'Edge' literally means a 'positive expectation in the long run'.

Some great posts here.

That sums it up in a nutshell I'd say.

Essentially the same way casinos and insurance firms operate, they don't "win" on every run / case either, but bottom line more than they have to payout to make it a worthwhile endeavour.