The thing about edge

[kut2k2]

Edge is one thing and only one thing : positive expectation. Either you have it or you don't. And if your trading plan doesn't have positive expectation, you don't have an edge.

I know a lot of you don't agree. I don't care. This isn't a matter of opinion, it is a matter of fact. Mathematical fact. And mathematics doesn't give a rat's ass about your opinion. Either you accept the math or you will fail. Like LTCM, who thought they were smarter than the math. Heard from them lately?

There are things that can enhance your positive expectation, things like good money management and lower commissions. There is absolutely nothing that can substitute for positive expectation. It doesn't matter how much exercise and good nutrition you get, how well rested and calm you are, how much meditation you perform, how low your commissions are, how fast your broker connection is, et cetera. Without positive expectation, you have nothing but trading failure in your future.

Two final things.

If lower commissions make all the difference between your trading strategy having positive expectation and nonpositive expectation, then you don't have much of an edge and you'd best be looking for a better strategy even if you decide to trade your current strategy in the interim.

And finally there is no such thing as "positive expectancy". Expectation has a precise statistical definition. I don't know wtf expectancy is, but I do know it isn't a statistical term.

 

[Visaria]

+1

 

[tradingjournals]

Did you ever ponder why there are queues at an airport, at a bank, etc?

 

[NoDoji]

Quote from kut2k2:

And finally there is no such thing as "positive expectancy". Expectation has a precise statistical definition. I don't know wtf expectancy is, but I do know it isn't a statistical term.

ex·pect·an·cy
noun: expectancy; plural noun: expectancies

1. the state of thinking or hoping that something, esp. something pleasant, will happen or be the case.

synonyms: anticipation, expectation, eagerness, excitement

ex·pec·ta·tion
noun: expectation; plural noun: expectations

1. a strong belief that something will happen or be the case in the future.

 

[Redneck]

Quote from NoDoji:

ex·pect·an·cy
noun: expectancy; plural noun: expectancies

1. the state of thinking or hoping that something, esp. something pleasant, will happen or be the case.

synonyms: anticipation, expectation, eagerness, excitement

ex·pec·ta·tion
noun: expectation; plural noun: expectations

1. a strong belief that something will happen or be the case in the future.

We should patent the Law of Uncertainty - as it trumps all other (in our world that is)

RN

 

[kut2k2]

mathematical expectation

noun

Mathematics. the product of the probability of the occurrence of an event and the value associated with the occurrence of a given event.

Statistics. the summation or integration, over all values of a variate, of the product of the variate and its probability or its probability density.

Also called expectation, expected value.

 

[dbphoenix]

Quote from kut2k2:

there is no such thing as "positive expectancy".

Except in Tharp's fevered fantasies.

The chief problem with all the "positive expectancy" business is that it encourages beginners to think that they can have a crappy win ratio and yet still win. Unfortunately, this is theoretically true. But it is at the same time psychological nonsense. There is nothing theoretical about the losses beginners rack up while they're waiting for the positive expectancy train. And buying into this may be one reason why they avoid finding a real edge instead of all the drek like good breakfasts and bunny slippers.

Ditto with "r:r" ratios. But that's another subject.

 

[tradingjournals]

Quote from kut2k2:

mathematical expectation

noun

Mathematics. the product of the probability of the occurrence of an event and the value associated with the occurrence of a given event.

Statistics. the summation or integration, over all values of a variate, of the product of the variate and its probability or its probability density.

Also called expectation, expected value.

Let us assume you have a positive expected value on past trades. What do you do with these problems: the variance, the drawdown, the probability that the expected value can become negative with you not knowing it yet, and the probability that your drawdown (in absolute dollars) hits the size of your account? There is no control over the probability distribution of the losses.

 

[kut2k2]

Quote from dbphoenix:

Except in Tharp's fevered fantasies.

The chief problem with all the "positive expectancy" business is that it encourages beginners to think that they can have a crappy win ratio and yet still win. Unfortunately, this is theoretically true. But it is at the same time psychological nonsense. There is nothing theoretical about the losses beginners rack up while they're waiting for the positive expectancy train. And buying into this may be one reason why they avoid finding a real edge instead of all the drek like good breakfasts and bunny slippers.

Ditto with "r:r" ratios. But that's another subject.

+1

Winrate isn't mathematically necessary but it does have an undeniable psychological effect. Unless one can adopt a Vulcan-like detachment, it's very tough putting up with a meager winrate regardless of how great the expectation.

 

[dbphoenix]

Quote from kut2k2:

+1

Winrate isn't mathematically necessary but it does have an undeniable psychological effect. Unless one can adopt a Vulcan-like detachment, it's very tough putting up with a meager winrate regardless of how great the expectation.

It's not especially difficult to determine who trades and who doesn't when it comes to things like this. It's also not especially difficult to understand why so many people fail for so many years. Though one wonders why at some point at least some of them don't stop and look at what they're doing and think fuck this and search for a better way.

Be that as it may, I've never encountered anyone who has a 30% winrate who can resist the temptation to cut his profits short if for no other reason than he finally has some. A 30% winrate does not mean after all that one loses two and wins one, then loses two more and wins another one. It can quite easily mean that one loses ten, or twenty, before coming up with a winner. And we are to believe that this individual when he finally gets his winner is going to let it run? Please.

But let's assume that this guy is disciplined and cuts his losers short as well. So he cuts his losers short and cuts his profits short. Even here he can make some money IF he has a relatively high winrate. But if he has a 30% winrate, he will before too long go broke. It's simple arithmetic.