How to find an edge ?

Wide Tailz said:
It should be "obvious" by now that if you really want an edge, look at all the accounts of everyone who is losing and take the other side of their trade. This was once called "running a bucket shop", and there may still be brokerages that do this.

How else are they gonna pay the electric bill for that server farm now that commissions are zero?

:D

In all seriousness, the final clue I am going to try to give you is to reverse your thinking. Charles Munger advocated for this continually before receiving his eternal reward.

What is the opposite of getting rich? Losing everything.

Therefore, begin looking for ways to not lose.

Look for the double negative. The counterstrike, not the haymaker.

The ambush, not the attack.

The upside may begin to present itself when you are no longer vulnerable.

Can you see on a chart where price reaches a DECISION POINT?

When the avalanche begins, it's a pretty low risk trade to bet it will continue!
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Berkshire Hathaway...I know, let's buy a railroad!!

Like we saw that coming...
 
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!!
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.

Not sure if this is exactly what you're looking for since the word edge is defined differently by different people...

I've been testing systems for a long time and have seen what kind of performance achieved in backtests will usually be successful when a strategy is subsequently traded with real money.

If a system is tested on daily charts in multiple futures markets that I trade (primarily futures indexes, currencies, grains) and consistently gives a win rate of approximately 50% or higher, a profit factor of 1.5 or above, and a max drawdown of less than 20% per year, it is a system with sufficient "edge" that I'm willing to trade it live. Reproducibility in multiple markets is an important consideration. Other performance metrics aren't as predictive (or aren't analyzed; I only focus on a few). Real world performance of each system varies after that...
 
Slope Trader said:
.

* win rate of approximately 50% or higher

* a profit factor of 1.5 or above

* a max drawdown of less than 20% per year
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Great objective summary of a profitable system.

Other factors (less important) are frequency of available trades and the surprise factor (overnight gap risk) and the "tail event" survivability.

I go long tails whenever possible. :D
 
What I have found day trading purely chart based on my own stats and few traders I personally know. Futures and forex only.
1. The methodology works on multiple instruments (unless the instrument has unique characteristics like session break)
2. Win rate >= 50%
3. Reward-to-risk ratio per trade >= 1.0
4. Expectancy ratio > 0.33 (expectancy per trade to average initial risk per trade ~ I prefer 0.5)
5. Average trade frequency average >= 10 per month per instrument (the higher the win rate, RRR and expectancy ratio, the lower the average trade frequency per month ~ -ve correlation)
 
Slope Trader said:
Hey, they're $2.50 per bottle in the vending machines at the school I work at.
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Inflation. When i was a kid, most places sold a coke for 10 cents and there was one store where you could buy them for 7 cents. In the vending machines when they jumped from 10 cents to 15 i thought it would slow sales down. Nope. About that same time i saw my first bottled water and said, people won't buy bottled water - aint no way. At that time (60 years ago) some folks were just getting indoor plumbing. Sure has changed a lot.
 
1. Front-Running
  1. Definition: Front-running occurs when a broker or other intermediary trades on advance information about a large order that will likely influence the price of a security.
  2. Example: If a broker knows a client is about to place a large buy order, they might buy shares beforehand, anticipating that the price will rise once the client’s order is executed. The broker then sells the shares at the higher price.
  3. Consequences: This practice is illegal because it exploits confidential information and disadvantages the client.
2. Insider Trading
  1. Definition: Insider trading involves trading stocks or other securities based on non-public, material information about a company.
  2. Example: An executive who knows about an upcoming merger and buys shares before the announcement is engaging in insider trading.
  3. Consequences: Insider trading is illegal because it undermines market fairness, giving those with privileged information an unfair advantage over other investors.
3. Wash Trading
  1. Definition: Wash trading involves buying and selling the same security simultaneously to create the illusion of increased trading volume, often to inflate the price or meet trading volume requirements.
  2. Example: A trader might buy shares from themselves using different accounts to make it appear that there is active market interest, misleading other investors.
  3. Consequences: This practice is illegal because it creates a false perception of market activity, misleading other market participants.
4. Pump and Dump
  1. Definition: "Pump and dump" schemes involve artificially inflating the price of a stock through false or misleading statements, only to sell it at the higher price before the market realizes the stock's true value.
  2. Example: A group might spread rumors about a small company’s supposed upcoming breakthrough, causing the stock price to rise. They then sell their shares at a profit before the price crashes.
  3. Consequences: This is illegal because it defrauds investors who buy in at the artificially inflated prices.
5. Churning
  1. Definition: Churning occurs when a broker excessively trades a client’s account to generate commissions, regardless of the client’s best interests.
  2. Example: A broker might frequently buy and sell securities in a client's account to increase their commission income, even if these trades are not beneficial to the client’s investment strategy.
  3. Consequences: This practice is illegal because it violates the fiduciary duty brokers owe to their clients, prioritizing commissions over client interests.
6. Quote Stuffing
  1. Definition: Quote stuffing involves rapidly placing and canceling a large number of orders to flood the market with information, making it difficult for other participants to execute trades.
  2. Example: A trader might submit thousands of orders in a short time to slow down competitors' trading algorithms, gaining an unfair advantage.
  3. Consequences: This practice is illegal because it disrupts the normal functioning of markets, causing delays and confusion for other traders.
7. Painting the Tape
  1. Definition: Painting the tape refers to transactions among a group of traders to give the impression of active trading, thus misleading other market participants.
  2. Example: Traders might repeatedly buy and sell a security among themselves to create the appearance of high demand, prompting others to buy in.
  3. Consequences: This practice is illegal because it manipulates the perceived value and activity of a security, misleading investors.
8. Bear Raiding
  1. Definition: Bear raiding involves short selling a stock aggressively to drive down its price and then profiting from the decline.
  2. Example: Traders might spread false negative information about a company to drive its stock price down, then cover their short positions at the lower price.
  3. Consequences: This is illegal because it involves market manipulation and can cause unwarranted harm to a company’s stock price and reputation.
9. Market Cornering
  1. Definition: Market cornering occurs when a trader or group acquires enough of a particular asset to manipulate its price by controlling supply.
  2. Example: A trader might buy up a significant portion of a commodity, driving up prices and forcing other market participants to buy from them at inflated prices.
  3. Consequences: This practice is illegal because it disrupts the normal supply and demand dynamics, leading to artificial pricing.
10. Layering
  1. Definition: Layering involves placing a series of orders at different price levels to create the appearance of supply or demand, with the intention of canceling these orders before execution.
  2. Example: A trader might place multiple buy orders just below the current price to make it look like there’s strong demand, then cancel them once the price moves up and sell at the higher price.
  3. Consequences: Layering is illegal as it manipulates the order book and misleads other traders.
 
oshjdf said:
What I have found day trading purely chart based on my own stats and few traders I personally know. Futures and forex only.
1. The methodology works on multiple instruments (unless the instrument has unique characteristics like session break)
2. Win rate >= 50%
3. Reward-to-risk ratio per trade >= 1.0
4. Expectancy ratio > 0.33 (expectancy per trade to average initial risk per trade ~ I prefer 0.5)
5. Average trade frequency average >= 10 per month per instrument (the higher the win rate, RRR and expectancy ratio, the lower the average trade frequency per month ~ -ve correlation)
More...
:thumbsup:

I day trade stocks for about a year, but only paper traded (sim). What I have is quite similar except as a scalper, frequency is ~10 a day.

I trade options with real money but that is a very different story.
 
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