A few months ago, I wrote about my thoughts on the Edge. Ever since that question was posed to me, I have been seeking what defines an edge. Before, in my naivete I thought an edge was positive expectancy, or discipline, or money management. Those who were in the know scoffed at the idea and stated that these are things that are part of a successful system, but do not constitute a 'real edge'. For the last few months, the concept of an edge was bugging me. It seemed everyone was talking about pressing the edge and edge this and edge that, as if it were the most obvious thing in the world. It seemed everyone knew what an edge was. Yet I didn't. I mean, I had a general idea of what the results of a profitable system were, and looking back at my own strategies I could see what worked, and what didn't, but I could not for the life of me pinpoint the exact edge, and why the systems were profitable.
I've finally come to a definition of 'Edge' that I am comfortable with, and clarified how it relates to expectancy.
THE EDGE
dictionary.com defines edge as it applies as:
"A margin of superiority; an advantage: a slight edge over the opposition."
Many things can be edges; the most prevalent image I had in my mind was that of a casino, in which the house has a built in 'edge' - due to the probabilities of the casino games being in slight favor of the casino, over time they are profitable. This is a statistical edge. An example of a statistical edge for trading was demonstrated in Schwager's interview with Gil Blake. Blake recognized that the markets were not completely random - there exists pockets of nonrandom price behavior which can be taken advantage of; in his case, more than 70% chance of follow through after x days, allowing him to swap funds. He took this a step further and applied it to many trades throughout the year, applying his edge over many markets.
Another example is faster execution - someone posted once that if all traders could pick tops and bottoms, those that could do it fastest would make money. This is a competitive advantage; an execution edge.
Many funds' edge is an analytical one. An analytical edge or informational edge is having analysis that others (re: the market) have not taken into account, thus locating inefficiencies in price.
The product of the edge, that is, how it manifests itself, is positive expectancy. Positive expectancy is the result; not the edge itself.
Tying this all together, in a profitable trading system with positive expectancy, the edge is the system's ability to locate and generate trading signals based on nonrandom price behavior, no matter what time frame - seconds, hours, days, weeks, months, years, etc, or style - fundamental, technical, statistical, etc.
As retired EliteTrader forum poster Acrary has shown, multiple uncorrelated trading systems/strategies come together to smooth out the equity curve and create consistent profitability. Probability also plays a role, as the more vehicles or trades generated, the more the effect of the edge, i.e. expectancy, plays out.
I've finally come to a definition of 'Edge' that I am comfortable with, and clarified how it relates to expectancy.
THE EDGE
dictionary.com defines edge as it applies as:
"A margin of superiority; an advantage: a slight edge over the opposition."
Many things can be edges; the most prevalent image I had in my mind was that of a casino, in which the house has a built in 'edge' - due to the probabilities of the casino games being in slight favor of the casino, over time they are profitable. This is a statistical edge. An example of a statistical edge for trading was demonstrated in Schwager's interview with Gil Blake. Blake recognized that the markets were not completely random - there exists pockets of nonrandom price behavior which can be taken advantage of; in his case, more than 70% chance of follow through after x days, allowing him to swap funds. He took this a step further and applied it to many trades throughout the year, applying his edge over many markets.
Another example is faster execution - someone posted once that if all traders could pick tops and bottoms, those that could do it fastest would make money. This is a competitive advantage; an execution edge.
Many funds' edge is an analytical one. An analytical edge or informational edge is having analysis that others (re: the market) have not taken into account, thus locating inefficiencies in price.
The product of the edge, that is, how it manifests itself, is positive expectancy. Positive expectancy is the result; not the edge itself.
Tying this all together, in a profitable trading system with positive expectancy, the edge is the system's ability to locate and generate trading signals based on nonrandom price behavior, no matter what time frame - seconds, hours, days, weeks, months, years, etc, or style - fundamental, technical, statistical, etc.
As retired EliteTrader forum poster Acrary has shown, multiple uncorrelated trading systems/strategies come together to smooth out the equity curve and create consistent profitability. Probability also plays a role, as the more vehicles or trades generated, the more the effect of the edge, i.e. expectancy, plays out.
