How do you know when you have found an edge

[riskfreetrading]

Quote from keep learning:

..How would one mathematically prove that an edge works?

Think about the difference between: it WILL work, and it SHOULD work. While something SHOULD work, it may not work.

Then the question become, why it should work? Look at the explanation of the why. You should not have in there something like, it worked in the past 65% of the time, or look at our performance, or our guy worked at goldman sachs, etc. That is not a mathematical argument/proof.

Example (non trading): if you were to jump from a building, one should give you a good estimate of your speed of when you will hit the ground, but assuming you are on earth, you do not have a parachute, you gave the correct height of the building, etc

 

[theboxer]

Quote from riskfreetrading:

Think about the difference between: it WILL work, and it SHOULD work. While something SHOULD work, it may not work.

Then the question become, why it should work? Look at the explanation of the why. You should not have in there something like, it worked in the past 65% of the time, or look at our performance, or our guy worked at goldman sachs, etc. That is not a mathematical argument/proof.

Example (non trading): if you were to jump from a building, one should give you a good estimate of your speed of when you will hit the ground, but assuming you are on earth, you do not have a parachute, you gave the correct height of the building, etc

How about if you invent a situation, similar to trading, and invent some simple mathematical proof, just as an example. It can be ass-crack simple, so as not to give away any of your money-making secrets.

 

[antincedo]

personally i think the tightest system is useless if one doesn't have the discipline to follow it..

to me the most integral part of trading is understanding and the developing of ones self. we all have our flaws and they happen to come out in our trading. (which is one of the reasons i love this the most)

if you can change yourself than you can conform to your 'edge' and actually have that positive expectancy that the system should have.

edit your strategy accordingly!

 

[shortie]

Quote from riskfreetrading:

Any mathematical edge will pass the statistical test, the opposite is not true.

It is hard to give an example of a mathematical proof without giving one of my edges. But if you pay for something, you should demand it.

I will not be surprised that those who have an edge such as the one I described are now smiling while reading this. Because they know that what I am writing is true and is one of their secrets.

RFT, sounds very interesting!

would you consider some general trading approaches more mathematically sound than others? e.g. which one is more sound: reversion to mean or trend following?

 

[riskfreetrading]

Quote from shortie:

RFT, sounds very interesting!

would you consider some general trading approaches more mathematically sound than others? e.g. which one is more sound: reversion to mean or trend following?

Shortie,

One can actually view trend following as a sort of mean reversion. The difference is that the mean in a trend following is what a mathematician would call "strictly monotone" (in everyday talk it simply means a rising or declining mean).

The trend follower is a beter on the mean to continue to rise (or to decline), and he is smart and patient to wait for the market to pull to his mean to enter. What makes him money is his prediction that the mean will continue to rise, and also his patience (or laziness depending on how you look at it) to stay with the trend. The reason why he stays with the trend is that he may realize over time that getting out and then getting in may lead him to less profit as if he is to miss just one of the re-entries he may miss a lot.

What is surprising is that the beginner trader sometime tries the hardest of tasks (which even the pros have given up on) which is to go against the trend. Maybe the non-experienced have in his head a flat mean when in fact the mean is rising or declining. This might be disease number 1 to remove from the head of the beginner in the sense that he assumes constant mean (maybe without realizing it or maybe he thinks highly of himself) for all stocks and markets.

Such people may not realize that they think they are assuming a mean reversion, when in fact the mean is rising (declining), and with it some white candles in .....



PS: Shortie: you are causing to release information. I should at least publish it in RFT's blog instead of writing here first under the risk that a given moderator will wake up one day or one second, and simply erase it.

 

[shortie]

Quote from riskfreetrading:

Shortie,

One can actually view trend following as a sort of mean reversion. The difference is that the mean in a trend following is what a mathematician would call "strictly monotone" (in everyday talk it simply means a rising or declining mean).

The trend follower is a beter on the mean to continue to rise (or to decline), and he is smart and patient to wait for the market to pull to his mean to enter. What makes him money is his prediction that the mean will continue to rise, and also his patience (or laziness depending on how you look at it) to stay with the trend. The reason why he stays with the trend is that he may realize over time that getting out and then getting in may lead him to less profit as if he is to miss just one of the re-entries he may miss a lot.

What is surprising is that the beginner trader sometime tries the hardest of tasks (which even the pros have given up on) which is to go against the trend. Maybe the non-experienced have in his head a flat mean when in fact the mean is rising or declining. This might be disease number 1 to remove from the head of the beginner in the sense that he assumes (maybe without realizing it or maybe he thinks highly of himself) for all stocks and markets.

Such people may not realize that they think they are assuming a mean reversion, when in fact the mean is rising (declining), and with it some white candles in .....

great explanation, thank you!

 

[Mercor]

You have found the edge when you stop posting to ET about finding the edge.

 

[antincedo]

isnt an 'edge' just knowing that your bad day could never exceed your average good day.

 

[riskfreetrading]

Quote from antincedo:

isnt an 'edge' just knowing that your bad day could never exceed your average good day.

You seem to assume that the + and - days are 50% each. Is that correct?

Add frequencies of events to your analysis, and tell us what you now think.

PS: I think I know what your answer might be. I usually receive a dozen answers to my above comment to your remark. I will know whether your mental view and your answer are among what I have seen so far.

 

[apak]

Quote from riskfreetrading:

You seem to assume that the + and - days are 50% each. Is that correct?

Add frequencies of events to your analysis, and tell us what you now think.

PS: I think I know what your answer might be. I usually receive a dozen answers to my above comment to your remark. I will know whether your mental view and your answer are among what I have seen so far.

at times you sound like jacko the whacko

I don't have a problem with what you say

I have a problem with # of posts you have

I'll PM you some time, we may be equals in awareness