How do you know you have an edge

[The Big D]

Quote from u21c3f6:

Actually, yes. For those familiar with the Kelly criterion, if you overallocate your bankroll, you can still go bankrupt even if you have an edge.

Joe.

While this is obviously true (and kudos for mentioning the Kelly criterion), I find these edge discussions to be sort of retarded.

Did you make good money over the last 40 trades? You're probably trading well. Did you lose? You probably traded poorly. The only exception to this rule of thumb would be cases where your trades have the nature of selling lottery tickets - frequent small wins paired with the occasional huge loss. Then you need a population that has maybe 10 of those big losses in it to know if you're profitable.

 

[trickshot]

Quote from Bolimomo:

?????

Doesn't having an "edge", by definition, means positive expectation over time?

You can have an edge but NOT profitable?

Its possible to still lose if the trader has poor money/risk management, though imo its much harder to find a true edge than it is to master risk/money management. No amount of money/risk management will make a trader profitable if he has no real edge.

 

[MAESTRO]

“The aggregate effect of shared mental biases and imitation results in patterns of behavior, which while they are nonconsistent with Mr. Spock-like, rational decision making or with informational efficiency, are demonstrably systematic. The market equivalent of these behavioral patterns is trending, whereby prices tend to move persistently in one direction or another in response to information. The widespread adoption of investing fashions like indexation, introduces market mechanisms, which magnify herding behavior on a large scale.“

David Harding - #1 Hedge Fund manager in the UK. His last year personal income was $240 M

He does have an edge, don't you think?

 

[wjk]

Quote from trickshot:

though imo its much harder to find a true edge than it is to master risk/money management. No amount of money/risk management will make a trader profitable if he has no real edge.

Perhaps the ability to adhere to a risk/management discipline is an edge.

 

[psytrade]

you start to get a bit of an edge when you're edge tells you, you no longer have an edge...

 

[NoDoji]

Quote from Bolimomo:

?????

Doesn't having an "edge", by definition, means positive expectation over time?

You can have an edge but NOT profitable?

Let's say my edge is that I buy or sell first and second breakouts in a trend. (So once a reversal signal is put in and a new trend begins I buy the break of the first or second new high, or I sell the break of the first or second new low.)

Breakouts sometimes fail, but I've found that at least 60% of first and second breakouts hit my profit target. I trade with 1:2 risk/reward ratio.

Let's say that in a given week there are 10 setups that meet my breakout criteria and my positive expectancy indicates that at least 6 of them will work in my favor and my 1:2 risk/reward ratio indicates that if I trade all 10 setups and 6 of them net me $200 each and 4 of them lose me $100 each, I've netted $800.

Now let's say I only trade 6 of my valid setups. By picking and choosing instead of taking all valid setups, I may end up choosing 4 losers and 2 winners. This would mean that despite having an edge (positive expectancy and solid R:R), I end the week down on slippage and commissions. If I only chose to trade 4 of my valid setups, I might choose 4 losers.

 

[jack hershey]

Quote from traderzhangSan:

You have been profitable every week for several months now.
How do you know if you really have an edge or just get lucky?

how many trades can determine one's true edge? by that I mean winning odds.

You have an edge when your trading approach doesn't use probability. That is, you have recognized probability is not a requirement in trading.

Another symptom is not using entry/exit approach. The alternative is hold/reverse.

 

[dst888]

If you are a trend follower, that would give you an edge if your system can tell you WHEN is the chop/consolidation/conflicting move/fighting of opposite forces, and you just stay out of it and relax.

 

[Trader666]

Entry signals from buying your "0 to 7 turn" per your paper "Catch Up With Tomorrow's Paper Today" are statistically indistinguishable from coin flips. So you've deemed probability irrelevant

Quote from jack hershey:

You have an edge when your trading approach doesn't use probability.

 

[MohdSalleh]

You have an edge when you make money, you do not have an edge if you lose money.