Do you need a real edge trading the Bond market?

[sle]

Hate to burst your bubble here but what you stated here is exactly the correct definition of an edge. An overall probability of repeated long term success.

No, edge is something that changes your personal profitability potential, giving you an advantage. For example, deal flow is an edge. Cheap funding is an edge. Better access to short borrow inventory is an edge. Extreme low latency is an edge.

In general, most buy-side traders/PM or retail investors do not have any real edges. It does not mean they can not be profitable, it's just harder.

 

[lovethetrade]

What about a retail trader that makes 50% per annum with $1 million capital? Lets assume he doesnt have access to deal flow, short borrow inventory or a trade execution edge. Does this trader have an edge?

 

[sle]

What about a retail trader that makes 30-50% returns per annum with $1 million capital? Lets assume he doesnt have access to deal flow, short borrow inventory or a trade execution edge. Does this trader have an edge?

For example, if he's sleeping with a bunch of company secretaries and has a flow of MNPI, he's got an edge. If he's just good at reading the mosaic or he stumbled on an unusual source of mis-priced instruments, he's good and he's got alpha, but no edge. Edge is something structural that differentiates your ability to make money from every other Joe in the market.

Think of it this way - edge is something that can not be taken away without significant (often prohibitive) upfront investment.

 

[lovethetrade]

What about if the retail trader that makes 50% per annum consistently has more "skill and knowledge" than the firm that invested heavily in obtaining a "structural edge" and only makes 20% per annum consistently. Does the retail trader have an edge?

 

[Tim Smith]

What about if the retail trader that makes 50% per annum consistently has more "skill and knowledge" than the firm that invested heavily in obtaining a "structural edge" and only makes 20% per annum consistently. Does the retail trader have an edge?

What a stupid post.

Everybody (except you, obviously) knows that risk increases exponentially with returns once you go above 5% .... i.e. the difference between 5% and 10% is already "a lot", the difference between 10% and 20% is "significant" and the difference between 20% and 50% is "a stupid amount of risk".

Any trader making 50% will only be doing so by either over-leveraging, over-trading or a mixture of the two. You CANNOT make 50% in the markets without taking on a SIGNIFICANT amount of risk (unless you are very lucky and pick the right stock to go long at the right time, but let's face it, you've probably got more chance of winning the lottery).

Therefore I would go with the "firm that invested heavily to return 20% consistently" any day of the week. Because I know that firm will have taken a good hard look at risk.

However lets face it, there aren't firms that consistently return 20%, because, as I said above ... ITS A LOT OF RISK.

So, in summary, you shouldn't care about percentages, you should care about how much risk you are taking on to achieve a percentage. And its a fact that the majority of retail traders take on far too much risk, blow up their accounts and become big fat loosers. Its not a case of if, but when !

 

[MoneyMatthew]

Let's not get off track here, I am sure what Algofy and other people call an "edge" just equates to a high level of personal confidence based on past results. I don't have any problem with someone who has a high level of confidence in a system or methodology. But the OP was asking about needing an "edge" in the Bond market.

I along with Sle just wanted the OP to be clear on what an actual "pure edge" is. You can be profitable without a provable mathematical edge. People talk a lot on this site about HFTs and "speed" and "low-latency" but they never really talk about what the speed is for. If I have a bad trading idea it does not matter how quickly I execute it, it is still a bad idea. In Vegas it does not matter how quickly I can stuff quarters into a slot-machine, it is still a bad bet. However, if HFTs can be first for example in a maker-taker venue/ECN to get to your incoming market order they can scoup up the rebate or cancel if there is no order to lean against. They can pick people off who telecast with "smart routes". This is just a small example of what a true edge is. This is vastly different from someone saying "gee, my moving average trading system is making money!".

To sle's point, a structural edge is an advantage over other participants. If I can get locates to short stocks that you cant get to then that is an advantage over other participants. Anyone can slap indicators on a chart and some will be profitable doing that. No one is denying you the ability to slap indicators on a chart. However, "edge" is zero-sum in the sense that someone wins and someone loses on execution. That "loss" could be speed of execution to be first to get a rebate/fill or it could be a "loss" in the sense that I have access to short a stock and you don't. "Edge" and "Advantage" almost become interchangeable here.

If you slap a 200-Period Moving Average on a chart then that is not an advantage, anyone can do that. No one is denying you the ability to do that. And yes you can be profitable doing that. Let's all just be clear on what a casual reference to "edge" is and what it means in its purest sense.

 

[luisHK]

About the closed aspect of the bond market, the large spreads, higher commissions, than the fine print, like how would a bond act in case of a take over, my impression is it looks more atractive for a retail investor to buy bond ETFs than individual issues, especially if you are not looking at superliquid emissions.
I'm regulary looking at single bonds, also on tws, and banks sure seem keen on selling them, especially that I ask, but it doesn't look like a retail friendly market.
Talking about buying bonds to hold long term btw,not to flip them.

 

[lovethetrade]

What a stupid post.

Everybody (except you, obviously) knows that risk increases exponentially with returns once you go above 5% .... i.e. the difference between 5% and 10% is already "a lot", the difference between 10% and 20% is "significant" and the difference between 20% and 50% is "a stupid amount of risk".

Thanks Tim, if I change it to 20/10%, will that be enough for you to take your medication?

I guess the key point I was trying to make is skill and knowledge is just as much an edge as any other type of edge. The ability to take on more risk and achieve higher returns might also be regarded as an advantage due to larger players being excessively risk averse.

Let's not get off track here, I am sure what Algofy and other people call an "edge" just equates to a high level of personal confidence based on past results.

Maybe the trader's logic is a bit more sophisticated than a moving average system, is based on sound logic and will continue to work well into the future.

If you slap a 200-Period Moving Average on a chart then that is not an advantage, anyone can do that. No one is denying you the ability to do that.

Isn't that a bit condescending to others that simply claim there's other types of edges other than a trade execution edge? I'm not sure anyone even mentioned indicators let alone a moving average system.

However, "edge" is zero-sum in the sense that someone wins and someone loses on execution.

Isnt that your definition? Not everyone is trying to win on execution. My definition of an edge is anything that gives one an advantage to derive consistent profits and it seems many online sources agree with that notion.

http://www.investopedia.com/article...tal-importance-defining-your-trading-edge.asp

http://en.tradimo.com/learn/trading-strategies/trading-with-an-edge/

http://traderfeed.blogspot.com.au/2007/10/how-do-you-know-you-have-trading-edge.html

 

[Tim Smith]

The ability to take on more risk and achieve higher returns might also be regarded as an advantage due to larger players being excessively risk averse.

What rubbish !

The "larger players" are, as you put it, "excessively risk averse" because they know the market a lot better than you do (they've got access to better data than you do, they've got teams of staff with more combined experience than you do). They know the realities of the market and they know exactly how much risk they can take without being stupid.

You see, the difference is, if you blow up your retail trading account, nobody gives a toss, you're just another one of those numbers of loosers making up the statistics.

But if the "larger players" blow up, their name will be all over the financial papers, they'll go bust, and to add to their joys, the regulators might start breathing down their backs too.

Slow and steady wins the race in the financial markets. Patience tends to be well rewarded.

Greed and gluttony tends to be eventually rewarded with the financial markets teaching you a lesson.

 

[lovethetrade]

What rubbish !

The "larger players" are, as you put it, "excessively risk averse" because they know the market a lot better than you do (they've got access to better data than you do, they've got teams of staff with more combined experience than you do). They know the realities of the market and they know exactly how much risk they can take without being stupid.

"More risk averse" is probably what I was looking for.

If I'm wrong then I guess it must make Michael Halls-Moore wrong also because he says something very similar in this interview.

https://chatwithtraders.com/ep-090-michael-halls-moore/

Retail traders arent exposed to risk on the same scale as the larger players and as you said are less accountable so they can afford to be less risk averse.