Do most traders even have an edge?

One of the things hardest to accept is that the future is uncertain. In Fortune's Formula, one percept that was included that as # of sample increase, the results should APPROACH what the long-term odds should be. For example, flip a coin 10 times, 100 times, 1m times, 10 trillion times. While we know the odds are 50/50 in the real world we may get very different results.

So, for example, you're "edge" might work in the first 1000 samples, but over the long-term it might be negative. This is one of the eternal questions for edge development (ie is your sample so small that its NOT significant), and how will you quanitfy in the future that you're edge isn't an edge at all (or maybe its BETTER than you thought).

Interestingly, this brings the point to position sizing, once again referring to Fortune's Formula when Thorp realized that that the player had a statistical edge in blackjack (versus what was believed, it was very small). Yet people still consistently loss.

I also have research demonstrating this with a positive expectancy game where most players lost (they're only option was to adjust their bet size).

Why? Because even with coin flips 5 losers in a row ppl with lower their bet size, and 5 winners in a row vice versa. (Actually in big Drawdowns many traders oversize to "get it back"). Consistent position sizing is a HUGE HUGE edge in my opinion.

I'll need to find the links to some of this research.

So, at this point I believe that

a) random entry/exits (say on the daily S&P with buy/sell) since it has long-side bias.

b) consistent position sizing.

c) Skewed Risk Reward (ie 3:1, etc).

... will actually unbelievably be a huge edge. Why? Consistent sizing even in drawdowns or equity highs, not panicking out at the wrong times, and skewed R/R meaning even if the odds were 50/50% theoretically it would still be positive expectancy.

This would be versus variable sizing (ie smaller or extremely large during DD, oversizing at equity highs typically), stopping out because of professionals fading common patterns (actually giving WORSE expectancy than random), and interpretation of results affects future performs (overconfidence/underconfidence, patterns working not working, the world out to get you whatever...).

William O'Neal stated (read somewhere) that one of his great disappointments was that none of his investors got the results that he posted. WHY? Because they added money at equity highs and took money out during drawdowns (This results in inferior performance is the long-term equity curve is up).

This is HUGE HUGE stuff, imho and really attacks most of what traders believe.

Unbelievable, this means the less you know the better you might do. This really attacks the psych of the trader.

(I trade ATS btw).

I'll be travelling so write and post some of my stuff when I can or when I get back.

Cheers.
 
so mike what you are basically saying is that a ''edge'' is whatever trading behavior or technique that you have that is profitable to you.

Therefore, every trader that makes money has a edge.

Therefore, waking up in the morning, being on time at your trading desk, clicking the mouse when its time, trading a strategy that ''statistically significant'' probably meaning it shows profits in backtesting, are all considered like so, because they lead to your profit.

If you are referring to a edge as the thing that good traders have that failing traders don't, then that would be called talent, experience, willpower (for discipline issues), etc etc

i always laugh when i see traders talk about their edge like if it was the shit. you trade profitably, or you dont, period.

my butter knife as an edge too you know.
 
I have done many tests on the S&P going back to 1996 with random entry and exit (long only). Here were the rules:

A) On a given day, randomize a number 1 through 10, if its 5 buy. If not a buy, go to next day. We invest 100% of equity in each trade.

B) If in a position (from A), randomize a number 1 through 10. If its a 5 sell. (Only do this if we're in already in a position from A).

I ran 1000 versions of this test. About 1/2 of 1% (.5%) resulted in a negative outcome (I ran several times and got similar results). (No commission or slippage included). This on on the DAILY S&P.

I used no STOPS (since we are randomly entering and exiting we should get some fraction of the return of the overall index).

How does this simple system beat (meaning MAKES money 99.5% of the samples) versus most people who ACTIVELY , EFFORTFULLY, and PURPOSELY are trying to make money? (Since most ppl lose). Could it be that ACTIVELY trying to beat the market actually has a NEGATIVE EXPECTANCY? (Or vary position size at the wrong time makes positive expectancy negative?)

You could argue that I am curve-fitting since I knew the market went up since 1996, and you'd be right; but one of the truism (though I don't agree with) is that long-term the market always goes up.


If a system had a long-term flat expectancy, but went thru periods of winning and losing, how long would a trader trade this "edge"?

(One of the things I find so entertaining is when traders are so certain that THEIR edge is truly an EDGE, in reality no one knows FOR SURE what the FUTURE results will be).


Such a simple system outperforming most partipcants, unbelievable. Fascinating stuff!
 
Now lets attach a name to this system. We will refer to Lunar Waves, or Q Cycles, or some Astrology, or whatever.

Now its a real system! Unbelievably, following our "Q Cycles" system, the average retail trader would actually DO BETTER than on his/her own. He (or she) would justify the monthly fees for our "holy grail" system because they would be HIGHLY LIKELY to be making money (tho it should lag buy and hold) with periods of out performance! Of course, we would tout all kinds of stuff like the developers being rocket scientists and the advanced particle labs we had to use to design this system. Our followers would believe us to be "gurus" of the market.


Doesn't this pretty much illustrate everything that is wrong when it comes to accepted trading beliefs?

What does this say about the industry?
 
Quote from empee:

I strongly disagree with virtually everything you've written here.

A) "Statistically significant" -- how do you quantify that. Do you have a sample size of N? I do considerable backtesting, Monte Carlo, and probably the hardest question to answer is -- IS IT STATISTICALLY SIGNIFICANT. To say that as a being a "given" is obtuse viewpoint at best. How many ppl who backtest have seen a system work great and then when say the test period changes it fails miserably?

b) Wrong and wrong. How can you say charts do not definitively provide an edge? As Taleb says (Black Swan) one instance disproves what you're saying. Until you can disprove say, head and shoulders don't work (I don't think they do) but there may be traders who can statistically show they do, you can't make blanket statements like that. I've seen ppl/trading with violation of every trading rule that have historically made money (not saying that it was STATISTICALLY SIGNIFICANT). There many be edges that you have or haven't thought of, once again to say "anything" can't be an edge is not true. Just because YOU haven't figured out an EDGE someone else has, doesn't mean it doesn't exist.

c) This is a good example of your whole post, obviously you have a market view/bias and anything that doesn't pertain to YOUR view is invalid. I don't agree that is "ALL" there is.

d) I would agree, that you have to at least know theoretically what your edge is.

e) This is probably the most RETARDED statement ever. First, I posted random entry exit, that doesn't not MEAN the markets are RANDOM. As I stated, for example, that the longer-term trend is up so clearly there is a upward bias (as far as we have seen, perhaps it ends i a crash and 0 which would nullify that statement). The causality you attach (markets aren't random because people aren't rational) I said neither.

This REPLY was excellent in many ways. First, it gives a FANTASTIC example of the close minded mentality of many traders. "Its my way or the highway"; I need to affirm everything I believe because anything that invalids my beliefs means my "edge" may not be the "edge" I thought it is (For example).

The purpose here is truth, instead of trading dogma. We are looking with an open mind to what really is going on. In my afore mentioned post I make the case that RANDOM entry/exit leads to often BETTER results than "pattern" entry/exit/stops.

For example, lets say I have an edge that violates one of the beliefs you use to create your "edge" - even tho it may work. Most ppl don't want to reveal their edge just to prove to anonymous posters that, in fact, that they can disprove some posters statement.

My point is that I believe most traders make money on the risk reward/money management and may even have NEGATIVE returns with classic T/A. (Ie random entry/exit exceeds certain T/A based "edges"). This does NOT connote that I believe or I am trying to communicate markets are RANDOM. There is a difference.

I'm travelling so I'll post some data. The point of this thread is to keep an OPEN mind and challenge COMMON BELIEFS of traders. This means we have to agree to have ALL our views challenged -- if they are "statistically valid" than they should hold up.
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Good replies. My comments were directed at the poster I quoted. Not necessarily towards your statements. I believe silvermotion's comment was sarcastic and rude (possibly wrongly so), hence, I replied with my own sarcasm.

I'm all for an open discussion:

a) "Statistically significant" likely means different things to different people. This is likely based on their mathematical background. Most important, IMO, is the way in which you test a an initial concept for a proposed strategy. One must be careful not to introduce bias (curve fit) during the in and out of sample testing. There are hundreds of things one can do wrong both before and during the actual strategy implementation... that said it is not my intention to start a thread about sound design principles. I am fortunate in that I have a strong financial mathematics background and put bluntly, this does make a difference. The system you mention is likely a system designed with combinations of curve-fitted data - the use of too many adjustable inputs without a solid fundamental base.

b) Charts - as the original poster referred to - as in a 4.5 min to frontrun a 5min - do not in a such case produce a edge. We are all looking at price at the same time, specifically looking for price patterns, as you mention. Whether that be on a 30 min or 5 min time scale *seems* arbitrary to me (if some one can prove me wrong then please do so). A key distinction - this is definitely NOT to say that price does not show repeatable patterns - which it definetly does and can be used to define a systemic edge. My issue was with the use of time scale as the poster referred to, not in the usefulness of charts.

c) Simple case example. Definetly not the only way. Doesn't mean anyone else's view is invalid, its just the way I look at markets. They are either testing price zones and reverting, or they are moving directionally. I did not mean to profess any more than that. My apologies if this came across as invalidating anything to the contrary.

d) Ok.

e) I know you said neither - I am venting a bit of frustration with that statement as it has been explored sooo many times. The point being twofold, 1) Everyone would be making loads of cash if random entry worked and 2) The selection of entry and exit *times* makes it inherently non-random - you would have to vary, randomly, all aspects of the trade to prove this theorem in any true mathematical sense. This involves the solution of some tricky PDE's where you have to set finite boundary conditions-- again another non-random selection opportunity... been there.

If I have come across a close minded, well, then be it. Maybe its the case that after doing this for sometime now I have become convinced of what does and doesn't work. I will make an effort to be open to what you have to say about "random" beating out "pattern", it is always interesting to hear another thought process on the matter.

Let's be clear though - are you making a case for or against T/A? I have no bias for/against it, its a tool that will provide me with *discretionary* information... but, systemically, TA has been "proven" to fail... right?

Regards,
Mike
 
Quote from silvermotion:

so mike what you are basically saying is that a ''edge'' is whatever trading behavior or technique that you have that is profitable to you.

Therefore, every trader that makes money has a edge.

Therefore, waking up in the morning, being on time at your trading desk, clicking the mouse when its time, trading a strategy that ''statistically significant'' probably meaning it shows profits in backtesting, are all considered like so, because they lead to your profit.

If you are referring to a edge as the thing that good traders have that failing traders don't, then that would be called talent, experience, willpower (for discipline issues), etc etc

i always laugh when i see traders talk about their edge like if it was the shit. you trade profitably, or you dont, period.

my butter knife as an edge too you know.
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Well sure... by definition you have an edge if you are profitable, right??

So why would you claim that an edge is an "illusion"? I guess that I still don't get it...

Talent and experience come from many years of practice (that's no illusion). Say that between 700am and 800am you know (from years of watching) that fading any spikes in the ES will work 70% of the time (given the right opening)... Maybe one can't program this but it is definetly an edge that is quantifiable simply because someone is profitably executing it over time....

Can your butterknife trade? Does is trade spreads? What's the fee structure? Where's the website?:D
 
If you cant statistically prove your edge beyond any reasonable doubt, then you probably dont have one.

If you dont know how to accomplish this, you are not a real trader.
 
Quote from Mike805:

Hah... too funny. You're either kidding or just plain ignorant. Let's assume the latter.

a) An edge is a statistically significant entry and exit plan that produces profit over time. If you have an entry that is 60% right with greater than 1-1 risk to reward then you have an edge.

b) An indicator is not an edge nor is anything you mentioned. Trust in you capacities means different things to different people.... some traders can buy panic and sell greed - they have a psychological edge. Generally, "anything" cannot be an edge... what a foolish statement to say such. Charts do not provide edge.

c) An edge can be quantified by exploiting two market characteristics - Directional days and Rangebound days. Simply identifying the two behaviors can produce an edge...

d) If you don't know what your edge is be it statistical or psychological, then you are a losing trader. Period.

e) Stop with the "random entry" garbage. Markets are not random. Markets display repeated behavior patterns - people make the same mistakes over and over again. That's why markets are not random - people are not rational. If you really think that markets are random then WTF are you doing on this site anyway?

Enough. This topic has been beaten to death by some very experienced and profitable traders. Do a search.

Oh, and the answer is no - most traders do not have an edge. If the majority did then we would have a non-volatile efficient market (i.e. an academic illusion).

Regards,
Mike
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Very well said. Mostly the last part.
 
Not wishing to disagree with everything you say, in fact you might assume agreement with anything not included below. You should also not read this as advocating the 4.5 minute bar.

Quote from Mike805:

b) Charts - as the original poster referred to - as in a 4.5 min to frontrun a 5min - do not in a such case produce a edge. We are all looking at price at the same time, specifically looking for price patterns, as you mention. Whether that be on a 30 min or 5 min time scale *seems* arbitrary to me (if some one can prove me wrong then please do so). A key distinction - this is definitely NOT to say that price does not show repeatable patterns - which it definetly does and can be used to define a systemic edge. My issue was with the use of time scale as the poster referred to, not in the usefulness of charts.

I could prove that particular choices of bar length are more meaningful than others ... but then I'd have to shoot you. But the basic principle is that if a large number of traders look at X and do something based on X then there may be the start of an exploitable edge. :)

Let's be clear though - are you making a case for or against T/A? I have no bias for/against it, its a tool that will provide me with *discretionary* information... but, systemically, TA has been "proven" to fail... right?

All thats been proven is that naive implementations of classic patterns fail the testers tests. Which IMHO is a good thing. :)


Oh, and the answer is no - most traders do not have an edge. If the majority did then we would have a non-volatile efficient market (i.e. an academic illusion).

That assumes that all edges significantly increase the efficiency of the markets. Fortunately they don't. :)

Regards,
Mike
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On the topic question: I believe that most successful traders have some combination of entry, exit, management, and state control that comprises an edge.
 
There is no such mystical thing some call an edge. This is a business of mathematical probabilities and human psychology
 
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