This "edge" stuff

Quote from SethArb:

how do the successful HF's
continue to keep

printing money? in time I should think their edges

disappear or are reduced ? or do they find new markets and new ways in which to exploit the "other side" ?
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3 arrows are stronger than 1.
 
Quote from TSGannGalt:

3 arrows are stronger than 1.
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Yes.. my friends, that is the secret. All you have to do is buy when the arrows turn green and sell when they turn red! It's that simple!


Oh dear. I just gave away the edge. :P


But in all seriousness, dictionary.com defines edge:

5. A margin of superiority; an advantage: a slight edge over the opposition.

I liked the examples someone gave earlier about having the fastest order execution or having the most capital.. those were great examples of an edge.

What one has to address I think is what gives you the advantage or margin of superiority over the market?

Effective analysis certainly plays a role.. so does discipline.. risk management.. all of these things contribute toward your margin of superiority; IE by having these aspects you'll perform better than someone who doesn't. Thus you have an edge over them.
 
Then theres this one I have told before after hearing Van Tharp say it. --- Van Tharp asked a room full of seminar attendees. What is your best risk reward idea. Buy microsoft etc.

Then one guy said. Open a donut shop next to a police station.
 
Based on Jem’s donut example — ‘location, location, location’ = trade entry, and converesly, recognising one's in the wrong location, vacating/exiting the location/trade asap, together provide an edge.

I kinda feel ‘edge’ is a bit of trading jargon since posts have described several ‘edges’, each different tho all contributing to successful trading, doesn’t ‘edge’ just mean profitability ?
 
Quote from NTB:

Random thoughts on common edges in no particular order:

....

Many more too many to list, you get the idea...
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Since NTB was so generous with his examples, I thought I should add a few.

Edges also come from other people not doing their job

eg

1) mutual funds not bothering to squeeze out the last penny in a merger situation, leaving it to the arbs, leaving behind a profitable business. Once they start to bother, the business shrinks.

2) indexers blindly buying/selling components on add/deletes, leaving a profitable business to frontrunners. Once they start to bother the business shrinks.

3) options purchasers/sellers not bothering to see if the option is fairly priced relative to others in the chain, leaving a profitable business to volatility arbs. Once they start to bother, the business shrinks.

... dislocations, sloppiness, structural rigidities, lack of information are all good places to find edges.

Can technical analysis be considered an edge .... goodness. Never say never I guess. After all trendfollowing is a form of technical analysis that certainly used to work very well.
 
Quote from TheStudent:

Since NTB was so generous with his examples, I thought I should add a few.

Edges also come from other people not doing their job

eg

1) mutual funds not bothering to squeeze out the last penny in a merger situation, leaving it to the arbs, leaving behind a profitable business. Once they start to bother, the business shrinks.

2) indexers blindly buying/selling components on add/deletes, leaving a profitable business to frontrunners. Once they start to bother the business shrinks.

3) options purchasers/sellers not bothering to see if the option is fairly priced relative to others in the chain, leaving a profitable business to volatility arbs. Once they start to bother, the business shrinks.

... dislocations, sloppiness, structural rigidities, lack of information are all good places to find edges.

Can technical analysis be considered an edge .... goodness. Never say never I guess. After all trendfollowing is a form of technical analysis that certainly used to work very well.
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Yes the market's short-term inefficiencies provide opportunities. As you say, I think these opportunities for arb will become smaller and harder to find as information becomes more widespread and easily available and many things become automated/computerized.
 
Anybody who really knows trading knows what an 'edge' is...but in case you don't, NTB just spelled it out here. Well put.

Quote from NTB:

Random thoughts on common edges in no particular order:

1. Local Pit Trader A gets Filling Broker B laid on a regular basis at XYZ Massage Parlor. Filling Broker B gets an order from Hedge Fund to sell 50 SPM6 at the market. Filling Broker B is sloppy with the order and sells it down a handle to Local Pit Trader A who buys it leaning against a 500 lot bid below.- that's an edge

2. $/Eur Trader at Major US bank has $ 1 Billion overnight order from big Asian customer to sell $/Eur @ 1.2800. Market is currently 1.2785/90. He takes out a short position in $/Eur at 1.2790 leaning against the clean-up of his 1.2800 order.- that's an edge.

3. Stock Trader John was roomates with Syndicate Manager Steve of Bulge Bracket investment bank. Stock Trader John is getting six-figure allocations of IPOs and selling them out the first print- that's an edge.

4. Sam has an automated stock trading system that is based upon speed of execution. He has the fastest computers in the world, has written the most efficient code in the world, and he happens to connect to the exchange via intranet because he is physically located in the same building (i'm not an expert on this stuff, just making the speed as an edge example)- that's an edge.

5. Bob has found a firm based in bumfuck Europe that allows him to switch investments within his whole life insurance policy daily. He switches from US large cap. equity to European large cap. equity to money market, etc. with no penalty and no limits. The insurance company is so antiquated that he realizes that they don't account for the changes in the currency movements. He figures out a way to arbitrage the movement in the currency by switching in and out of certain investments based upon stale currency fluctuations- that's an edge.

6- Bill G. has more capital than anyone in the world and therefore has the most staying power- that's an edge.

7- Stevie has better contacts for information flow than anyone in the world and can utilize that information to directly turn profits- that's an edge

8- Stacey has built a better mousetrap (not just claims she did)- that's an edge

9- John is the smartest guy in the world- that's an edge

10- Mike claims to understand the fundamentals of stocks, studies technicals and practices good risk management- not an edge- show me the money- prove yourself over 20 years.

Many more too many to list, you get the idea...
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for example:

a system that can be utilized to provide 51 winners and 49 losers for every 100 games of craps, blackjack or whatever gives you an edge. once you have the edge, all you do is play as many games as possible that fall w/in the parameters of the system.
 
lot of thanks around the horn for some good discussion. Agree that NTB has provided some nice food for thought-style examples.
 
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