Identifying an edge

[piezoe]

Quote from MarkBrown:

ltc failure was they had book smarts and not street smarts or the perfect combination of these two. they also suffered from pride because they would not admit their formula was flawed. plus they did not prepare for failure or they would have survived. many others prepare for failure before they even think of success, and your practice failure scenarios in advance.

As an aside, those that want to really understand how LTCM got into trouble would do well to read Chapter 6 in Richard Bookstaber's beautifully written book, "A Demon of our Own Design."

LTCM did not fail because their "formula was flawed."

 

[piezoe]

Quote from Epic:

LTCM's edge ceased to be en edge when they stopped using it. The problem with their edge was the same as with most edges. They do not scale indefinitely. LTCM continued to scale their strategy well past the point that the edge disappeared.

A person would have a tough time making a case that LTCM didn't have an edge when all the facts are considered.

I quite agree with your post above.

 

[Visaria]

To me, an edge has to be explained in words, not just be measurable. Otherwise you could just have a lucky run of winning periods and solely because your acct equity has been rising, you may think you have an edge. But it may just have been pure luck.

I have enjoyed playing blackjack in a casino in years past when on vacation. I recall winning every night in a row for 5 nights. Does this mean I have an edge? Of course not! I know full well the casino will take around 0.5% of my all wagers in the long term.

 

[NoDoji]

Quote from Visaria:

I have enjoyed playing blackjack in a casino in years past when on vacation. I recall winning every night in a row for 5 nights. Does this mean I have an edge? Of course not! I know full well the casino will take around 0.5% of my all wagers in the long term.

Blackjack is a game in which you can truly have an edge. I'm a consistent winner at blackjack, not because I count cards (although I must say having an exceptional visual memory is helpful), but because I can play the game strictly by the rules with no emotional disruption, and with very defined rules for managing risk, booking profits and sizing up.

Sounds a whole lot like successful trading? It absolutely is.

Where does the edge in blackjack come from when we all know the casino always has the edge? Well, the casino has the overall edge, but it's a thin edge and the majority of players simply can't follow strict rules that bring them nose to nose with that razor thin casino edge. They let emotion get to them, even if it takes a while for it to happen. If you're one of the few who can master that aspect of the game, you can win quite consistently.

Poker is similar.

These are games that aren't simply a pull of a handle, toss of a coin. Once you bring the human factor into play, there's room for an edge to be exploited by more than just the casino.

I'm pretty sure that Blackjack and Poker are the two casino games that people play professionally on a consistent basis because of this.

 

[Visaria]

Hmmm, can you explain how you have an edge in playing blackjack without counting cards? I mean, I follow basic strategy to the letter when playing, but I know that the casino still has the edge on me.

 

[Handle123]

Quote from Visaria:

To me, an edge has to be explained in words, not just be measurable. Otherwise you could just have a lucky run of winning periods and solely because your acct equity has been rising, you may think you have an edge. But it may just have been pure luck.

I have enjoyed playing blackjack in a casino in years past when on vacation. I recall winning every night in a row for 5 nights. Does this mean I have an edge? Of course not! I know full well the casino will take around 0.5% of my all wagers in the long term.

If you just play the Basic Strategy the house has an .5 to 1% edge of the player with a one deck shoe, however if a player is counting cards with same one deck shoe, the player can get up to 2% in long term edge.

 

[mikeenday]

at the late stage of the trading, you need to do some anti-knowledge work, to try not to seek answers for the price moves.

Don't ask, nobody can answer.

read prices bid/ask, and takes couple of years. and lose some money, graduate from school of hard knock, you will have the edge.

Quote from erol:

Hello,


I've accumulated a lot of knowledge ...............

 

[Rabbitone]

What all successful traders eventually find out is that their “edge” in the markets is a form of artificial intelligence that is unique to them alone and has its own trading characteristics. In the process of discovering this “edge” each trader develops a rules based expert system to execute trades that works from their trading experiences with a set of trading controls than suits their financial needs.

An “edge” in trading is a set of expert trading rules that surround a statistical advantage based on market and price behavior that has a high probability to recur in the future. When a trading “edge” produces it can be exploited profitably using the trader’s controls.

To find out if an “edge” is persistent through time a trader applies one or more forms of back testing (data mining) of the trading rules to further conclude this form of artificial intelligence is truly time tested and worthy of trading live. To be deemed a winning “edge” an “edge” must during live trading be like (or some what similar to) the expectancy the trader finds during testing.

To keep the “edge” expert trading rules working in line with their financial assets the trader refines their a set of controls in their trading plan. A trading plan describes how the “edge” works, specifies rules for trading the “edge” with the traders capital, what the trader’s goals or expectations are from the “edge”, what the capitalization requirements are trade the “edge”, the traders psychological plan to trade the “edge”, and a disaster plan to trade the “edge” to name a few to major topics. The objective of this plan is to protect the trader’s capital and limit losses if times far worse than we found in testing the “edge” do occur.

The poorer that a trader defines trading rules for their “edge” and the fewer the controls the trader has in their plan for trade management for their “edge” the greater the chance for mistakes during live trading. High levels of mistakes in live trading can eat profits alive and turn a winning “edge” into a losing “edge.”

Then lastly the trader must monitor the “edge” with personal logs and performance reviews to measure it. This is the QA (quality assurance) check to make sure the “edge” works. If the failure rate is outside the acceptable limits of the edge for an extended period then it is time to reevaluate the “edge.”

 

[Visaria]

Quote from Handle123:

If you just play the Basic Strategy the house has an .5 to 1% edge of the player with a one deck shoe, however if a player is counting cards with same one deck shoe, the player can get up to 2% in long term edge.

Well, maybe, but NoDoji says she is a consistent winner without counting cards. I just can't understand that. You can play perfect rules and have the best money management possible (booking profits???), yet mathematically you are not going to win overall.

Quote from NoDoji:


Blackjack is a game in which you can truly have an edge. I'm a consistent winner at blackjack, not because I count cards (although I must say having an exceptional visual memory is helpful), but because I can play the game strictly by the rules with no emotional disruption, and with very defined rules for managing risk, booking profits and sizing up.

 

[kut2k2]

Quote from Visaria:

Well, maybe, but NoDoji says she is a consistent winner without counting cards. I just can't understand that. You can play perfect rules and have the best money management possible (booking profits???), yet mathematically you are not going to win overall.

Yeah there was a guy who claimed to be a "consistent" casino craps winner; he even wrote a book. I choose to believe the math: if it's a negative expectation game, then it's a sucker bet and "consistent winners" are either miraculously lucky, suffering from selective memories or just BSing.