How to find an edge ?

Investor here...

I usually look for industry leaders who have had a bad quarter. I also look to see if they have a wide moat (think Apple).

The market beats the tar out of the company for a few days. I put in a low price and wait for the market to come to me (hopefully)...Many times the market wakes up and starts buying quickly.

Having bought, if I like the company, I will do a covered call leap, way out of the money (for extra income).

If I am not sure about the company (looks good on paper...But I have my doubts), I will do a covered call (leap again) just out of the money. Just glean the option premium...If it gets called away fine!! If not, I own 100-200 shares of a quality company that has taken a little bit longer to turn it around.

And yes, I will make mistakes. If the stock drops 20-30%, I'll buy back the option, then dump the company...

I know this sounds crazy...But it has worked for me over the years.

I don't think this is an edge. It's more like common sense...
 
SimpleMeLike said:
Good Evening Sekiyo,

Can please express or define quantify how to know when an edge is found in your opinion?
More...

Hi SimpleMeLike,
Great question !

In my opinion an edge is found when we have a positive expectation. It’s tough to say because we can’t be sure about our little calculus as it’s always a tentative approximation of the reality.

But with experience, trials and errors, our little calculus becomes more and more accurate.

Backward testing is fine to raise theory or hypothesis but the real test is forward.

Then we have to adapt, learn and evolve alongside the incoming iterations.

So we never know, but as long as our theory isn’t violated by reality then we might be onto something. What’s the refutation’s point ?

That’s the fake coin problem. As per our experience we know the probability is 1/2 tail or head. We might not know in advance and how many tosses does it take to say this coin isn’t actually fair ? That we don’t have an edge ?

Guess it’s better to observe, gather just enough information then adopt a strategy.

For me an edge in the market is simply 1. a good entry 2. a bias in the underlying

A good entry because you can be wrong on the direction and make money. A bias because it puts the odds in your favor over time.

If we catch trends, we make more money and more often.

I am not a quant guy.
Just another simple guy.
 
Last edited:
@Sekiyo , capital markets are very efficient, most private investors won't be able to find edges because none are to be found.

Classical trendfollowing can be forgotten, because of the whipsaws.

A better idea may be to work, if you can, in a good paying job and simply save into low cost index fund on the NDX and / or invest in the tobaccos, see my thread entry.

Problem with classical trading, is in addition the high cost barrier. Each transaction costs money + the bid/ask spread, taking money out of traders' pockets.
 
Sekiyo said:
Hi SimpleMeLike,
Great question !

In my opinion an edge is found when we have a positive expectation. It’s tough to say because we can’t be sure about our little calculus as it’s always a tentative approximation of the reality.

But with experience, trials and errors, our little calculus becomes more and more accurate.

Backward testing is fine to raise theory or hypothesis but the real test is forward.

Then we have to adapt, learn and evolve alongside the incoming iterations.

So we never know, but as long as our theory isn’t violated by reality then we might be onto something. What’s the refutation’s point ?

That’s the fake coin problem. As per our experience we know the probability is 1/2 tail or head. We might not know in advance and how many tosses does it take to say this coin isn’t actually fair ? That we don’t have an edge ?

Guess it’s better to observe, gather just enough information then adopt a strategy.

For me an edge in the market is simply 1. a good entry 2. a bias in the underlying

A good entry because you can be wrong on the direction and make money. A bias because it puts the odds in your favor over time.

If we catch trends, we make more money and more often.

I am not a quant guy.
Just another simple guy.
More...
Good Morning Sekiyo,

Thank you, but you did not answer my question.

here is the question

1. Can please express or define or quantify how to know when an edge is found in your opinion?

In other words, how does a trader know when to bet/invest on a trading edge found or discovered.

Please quantify with numbers, not words!!
 
SimpleMeLike said:
Good Morning Sekiyo,

Thank you, but you did not answer my question.

here is the question

1. Can please express or define or quantify how to know when an edge is found in your opinion?

In other words, how does a trader know when to bet/invest on a trading edge found or discovered.

Please quantify with numbers, not words!!
More...

Just translate words into numbers.
 
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