defining "edge" with discretionary trading

[indicator777]

I was long the VIX ahead of Brexit I used a short put spread so I had defined risk reward. Hey, the market had a rediculous bias for remain going in but the polls in reality were still uncertain......got a good deal on that spread.

This is more like random discretionary trading with confirmation bias. You may want to consider quantitative discretionary trading. There is a blog with some articles on this style. I find it interesting but it involves some amount of work not everyone can or may be willing to put. These are some of the problems with discretionary trading

Sample size is usually small
Data-mining bias is still present
No out-of-sample cross-validation is possible
Time consuming task that must be well organized

from this article

 

[KMeriwetherD]

This is more like random discretionary trading with confirmation bias. You may want to consider quantitative discretionary trading. There is a blog with some articles on this style. I find it interesting but it involves some amount of work not everyone can or may be willing to put. These are some of the problems with discretionary trading

Sample size is usually small
Data-mining bias is still present
No out-of-sample cross-validation is possible
Time consuming task that must be well organized

from this article

Indeed. This was not meant to be an example of the kind of discretionary trade I would do on a regular basis. (There was no technical context which gave me any frame work to make it). It was just something anomalous I did for fun, but did demonstrate the importance I see in setting up favorable risk reward. (The ATM VIX put spread was risk $20 to make $80..... not bad)

 

[Smart Money]

I am a developing trader who is just coming out of a phase of experimenting with algorithmic non-discretionary trading. With that approach, knowing what your edge is can be directly quantified with proper back testing. Since then I have abandoned systems trading because I became frustrated with the non-discretionary aspect.....a.k.a ignoring context all together. (and the seemingly inescapable obnoxious drawdowns based on dumb trade after dumb trade). I now am focused on trading with discretion based on market structure context and price action. My question is, as a trader who is making trades based on each specific situation, how do you define what your edge is? You can't back test discretionary trading.

You can back test the individual structures/ profiles that you will base your opinion of context on. However, that is just the same as back testing multiple algorithmic signals and then thinking that merging them together makes for a stronger signal. Then you are back to square one where you only have an edge if you follow the signals without discretion.

So, again, as someone who trades with discretion, what is your edge?

I think all you need to do is trade it and track your success and failure rate. Like a baseball player's potential batting average, you can only speculate on what it might be when he moves from the minor leagues to the major leagues until he actually gets some opportunities at bat.

 

[Scataphagos]

you only have an edge if you follow the signals without discretion.

Even that is not an edge. Perhaps depends upon how one defines "edge".. but there are only 2 genuine edges for trading in the American markets.... front-running (HFT algos excepted, of course, because they "steal only a little") and trading on insider info... both technically illegal.

 

[KMeriwetherD]

Even that is not an edge. Perhaps depends upon how one defines "edge".. but there are only 2 genuine edges for trading in the American markets.... front-running (HFT algos excepted, of course, because they "steal only a little") and trading on insider info... both technically illegal.

Well, that's a bit jaded, yes? On a forum for retail traders, you are basically saying retail traders don't have a chance.

 

[Scataphagos]

Well, that's a bit jaded, yes? On a forum for retail traders, you are basically saying retail traders don't have a chance.

No, not at all.

All I'm saying is that there is no "edge"... no Holy Grail... so don't bother looking.

Proper trading is like counting cards in Black Jack. Traders need to learn when/why the odds favor some play and act accordingly.

 

[Mtrader]

All I'm saying is that there is no "edge".

The fact that almost everybody agrees that there is no edge is the ultimate proof that there is one. To have an edge the majority should think there is no edge. Edges can only exist if the majority denies it existance, if not the potential profit will be ruined as everybody would know what to do to profit from that edge and that would ruin the edge.
Only those who know an edge will know an edge can exist. But they have to be silent to protect their edge. That's why these edges never appear anywhere. An edge that becomes public is no edge anymore.
Sorry, I cannot explain it in an more simple way.

PS: an edge is not equal to Holy grail.

 

[MKTrader]

No, not at all.

All I'm saying is that there is no "edge"... no Holy Grail... so don't bother looking.

Proper trading is like counting cards in Black Jack. Traders need to learn when/why the odds favor some play and act accordingly.

I think it's just a matter of semantics. An edge can be very slight edge...like beating the S&P 500's annual returns by 0.5% yearly with a little less volatility.

As for the original question, I'm not sure if you can define it. The only possible way is to actually trade until you have a sample with statistical significance that has included many types of market conditions (bull, bear, low vol, high vol, flat, etc.).

 

[newwurldmn]

Even that is not an edge. Perhaps depends upon how one defines "edge".. but there are only 2 genuine edges for trading in the American markets.... front-running (HFT algos excepted, of course, because they "steal only a little") and trading on insider info... both technically illegal.

I would add some legal edges:

Cheaper financing
Better access to deal/order flow
Regulatory advantages (especially in other countries where you can avoid stamp taxes and trading restrictions)

 

[KMeriwetherD]

No, not at all.

All I'm saying is that there is no "edge"... no Holy Grail... so don't bother looking.

Proper trading is like counting cards in Black Jack. Traders need to learn when/why the odds favor some play and act accordingly.

ok, right. I need to stop using the word "edge" because I am being misinterpreted. What I really mean to discuss is why a trader thinks they can win over time. Unless you can define why you are a profitable trader, I'm pretty sure your days are numbered. As a discretionary trader, I am finding that difficult. I don't want to be lucky. I want to understand why I'm profitable. In your words...... I want to know how I have placed the odds in my favor and why I should believe my actions will equate to profits over time.