Three Sources of Edge

[wrbtrader]

I think we largely agree. If I was to draft up a full reply, it would just be arguing semantics of my original points. I don't really want to go down that route though. I would consider psychology being categorized as an edge borderline unprofessional also.

Psychology hasn't really gotten the respect it needs in any occupation field although more businesses are investing heavily into as they try to find ways to have more effective employees.

Some even use it for profiling purposes (e.g. certain occupations in the military, police work)...some people call these personality tests, interrogations (my favorite opinion)...they get a bad rap because often these tests are not scientific yet helps to identify certain types of individuals. I myself don't approve of such because the tests are outdated and administered by individuals that are not qualified nor have any education in the field. Yet, this industry has exploded from a 100 million dollar to a 700 million dollar industry in just a matter of a few years.

In addition, there's well documented discrimination lawsuits about such after people have been denied a job simply because they failed the test...failed the cognitive abilities involving certain tasks. Simply, people just don't like being told the reason why they didn't get the job is because their personality sucks or they wouldn't be an effective member of the team (work place).

Now getting back and specifically about investing/trading...a few years back I met someone that works for a firm that specializes in behavioral science of the financial markets...a firm that is hired as a consultant by many of wall street biggest names. One aspect of their business is that they've designed computer programs that gauge the emotions or moods on social media and it then sells the computer analysis to wall street.

The other aspect of their business involves working with professional traders to help minimize irrational decision making...the anomalies that traders have difficulty in explaining why they did what they did that resulted in their losses.

Now lets drop down a level to retail traders and use this forum for example involving traders that have admitted the reasons to their failure is their inability to follow their trading plan with real money. In contrast, these same traders had a trade method they've backtested that showed a positive expectancy or they had positive trading results on similar.

Yet, when they traversed into real money trading...it all falls apart...this issue is layered with journals about such. It's proof that there's a "behavior" (psychological) element missing when traders move from profitably trading in simulator to real money trading. This element doesn't show its face in simulator nor backtesting...just real money trading. Once again, not much of a debate considering we have dozens of trade journals here at this forum alone that traders talk about their problems when they move from paper trading to real money trading.

The sad part is that their inability to recognize its "psychological" is the reason why their trading problems continue and the trader then has these unrealistic beliefs they can be a profitable trader while continuing to fix the behavior problem.

What do they do instead ?

They tweak their method again in hopes that it will fix their psychological problem. Seriously, it just doesn't make any sense. If you have a method with a positive expectancy in backtesting but you're not able to make profits when traversing into real money trading...

Why tweak the method when the trader can fix the real problem...their inability to deal with the realities of trading with real money on the line.

Traders that don't have this problem or able to minimize its impact in their real money trading results...they have a psychological edge. Further, there's a group of traders that preach discretionary trading is part art. Yet, the same group of traders are in contradiction when they say the "psychology" of trading is voodoo. It's not possible to be one and not the other too. Simply, I believe there's an "art" to being a discretionary trader and that art is how we psychological manage or not manage our trading.

By the way, the first time I heard the word "edge" being used...it was in sports via the phrase mental edge long before I heard it used in the financial markets and the military...ever since I was a kid in the 70's. In addition, last year I was watching a documentary about F1 racing and in one particular segment of the documentary there was an interview in the 60's in which one particular owner stated "his drivers have a mental edge".

Simply, the psychology of ones performance (bad or good) has been around a very long time and is now being computer analyzed by wall street beyond just giving a potential employee a "cognitive skill test".

 

[Maverick74]

Which reflects what exactly


1.) Someone is holding a gun to their head..., forcing them

2.) Their own mental make up is holding them hostage..., causing them to do stupid shit


You say you don't believe in the psychological aspect - yet offer up a prime example where psychology plays a major role


=================

Yeah - proper / balanced psychology is an edge - and a hellofa good one at that


RN

Here is what I believe. And this is based on a very limited 17 year data set that includes over 1000 traders I have traded with over the years so keep that in mind.

Most guys start out well enough, doing research, reading books, asking questions, trying learning a programing language or two. Most begin with good discipline, taking small losses, following their plan, blah blah, blah, etc. At some point the grim reaper knocks on their door. He shows up in disguise which makes him very hard to identify. His disguise is time. At some point, time grinds away at all traders. After failing at every strategy they try, most traders (certainly most on this site) eventually throw in the towel and do mean reversion (fading). Averaging down into losers or simply selling premium. It provides just the right opium to trigger a positive response from their pleasure sensors. Because fading moves and selling juice works (most of the time). They convince themselves that they found something no one else has and they have the p&l to back it up. So the grim reaper goes away. The next time he comes back.....he won't be so polite as to knock.

 

[Redneck]

At some point, time grinds away at all traders

Can't argue with this.., because at some point we all die - time wins


=====================

As for the gist of your post - those types of traders haven't solved the mental aspect - that you even stated:

good discipline, taking small losses, following their plan,

ad infinitum..., ad nauseam - till retirement..., or death

Its what trading is..., its all that trading is

RN

 

[newwurldmn]

The only three edges are:

1. Access - to investment opportunities (ala buffet's deal with Goldman)
2. Funding - quality of capital and cost of capital (ala bulge bracket banks that fund at better than libor)
3. Information - access to better information. (Ala SAC)

 

[wrbtrader]

...Most begin with good discipline, taking small losses, following their plan...They convince themselves...

For a second I thought you were giving psychological explanation about why traders do what they do...I must be mistaken (sarcasm).

The only difference between you and I is that I actually use that words called psychology and behavior. In contrast, you say the same thing without using those words.

right opium to trigger a positive response from their pleasure sensors

 

[Guile]

Here is what I believe. And this is based on a very limited 17 year data set that includes over 1000 traders I have traded with over the years so keep that in mind.

Most guys start out well enough, doing research, reading books, asking questions, trying learning a programing language or two. Most begin with good discipline, taking small losses, following their plan, blah blah, blah, etc. At some point the grim reaper knocks on their door. He shows up in disguise which makes him very hard to identify. His disguise is time. At some point, time grinds away at all traders. After failing at every strategy they try, most traders (certainly most on this site) eventually throw in the towel and do mean reversion (fading). Averaging down into losers or simply selling premium. It provides just the right opium to trigger a positive response from their pleasure sensors. Because fading moves and selling juice works (most of the time). They convince themselves that they found something no one else has and they have the p&l to back it up. So the grim reaper goes away. The next time he comes back.....he won't be so polite as to knock.

What in the hell is a prop trader supposed to do these days anyway? At least if you're fading, you might get paid for providing liquidity. Fade a spread and pray that it won't go to 0 or infinity. Shit this is depressing

 

[cjbuckley4]

Psychology hasn't really gotten the respect it needs in any occupation field although more businesses are investing heavily into as they try to find ways to have more effective employees.

Some even use it for profiling purposes (e.g. certain occupations in the military, police work)...some people call these personality tests, interrogations (my favorite opinion)...they get a bad rap because often these tests are not scientific yet helps to identify certain types of individuals. I myself don't approve of such because the tests are outdated and administered by individuals that are not qualified nor have any education in the field. Yet, this industry has exploded from a 100 million dollar to a 700 million dollar industry in just a matter of a few years.

In addition, there's well documented discrimination lawsuits about such after people have been denied a job simply because they failed the test...failed the cognitive abilities involving certain tasks. Simply, people just don't like being told the reason why they didn't get the job is because their personality sucks or they wouldn't be an effective member of the team (work place).

Now getting back and specifically about investing/trading...a few years back I met someone that works for a firm that specializes in behavioral science of the financial markets...a firm that is hired as a consultant by many of wall street biggest names. One aspect of their business is that they've designed computer programs that gauge the emotions or moods on social media and it then sells the computer analysis to wall street.

The other aspect of their business involves working with professional traders to help minimize irrational decision making...the anomalies that traders have difficulty in explaining why they did what they did that resulted in their losses.

Now lets drop down a level to retail traders and use this forum for example involving traders that have admitted the reasons to their failure is their inability to follow their trading plan with real money. In contrast, these same traders had a trade method they've backtested that showed a positive expectancy or they had positive trading results on similar.

Yet, when they traversed into real money trading...it all falls apart...this issue is layered with journals about such. It's proof that there's a "behavior" (psychological) element missing when traders move from profitably trading in simulator to real money trading. This element doesn't show its face in simulator nor backtesting...just real money trading. Once again, not much of a debate considering we have dozens of trade journals here at this forum alone that traders talk about their problems when they move from paper trading to real money trading.

The sad part is that their inability to recognize its "psychological" is the reason why their trading problems continue and the trader then has these unrealistic beliefs they can be a profitable trader while continuing to fix the behavior problem.

What do they do instead ?

They tweak their method again in hopes that it will fix their psychological problem. Seriously, it just doesn't make any sense. If you have a method with a positive expectancy in backtesting but you're not able to make profits when traversing into real money trading...

Why tweak the method when the trader can fix the real problem...their inability to deal with the realities of trading with real money on the line.

Traders that don't have this problem or able to minimize its impact in their real money trading results...they have a psychological edge. Further, there's a group of traders that preach discretionary trading is part art. Yet, the same group of traders are in contradiction when they say the "psychology" of trading is voodoo. It's not possible to be one and not the other too. Simply, I believe there's an "art" to being a discretionary trader and that art is how we psychological manage or not manage our trading.

By the way, the first time I heard the word "edge" being used...it was in sports via the phrase mental edge long before I heard it used in the financial markets and the military...ever since I was a kid in the 70's. In addition, last year I was watching a documentary about F1 racing and in one particular segment of the documentary there was an interview in the 60's in which one particular owner stated "his drivers have a mental edge".

Simply, the psychology of ones performance (bad or good) has been around a very long time and is now being computer analyzed by wall street beyond just giving a potential employee a "cognitive skill test".

I see what you're saying, but having the right mentality is not an edge. Much like the military or sports, having the right attitude is a prerequisite, it's not an edge. Very few of the people on here who failed trading backtested systems actually had any edge to begin with. They didn't fail because they lacked the psychological wherewithal to trade, they failed because their systems either didn't work or had insufferable drawdown.

I agree with what you're saying about having the right attitude and "mental toughness" being a factor in trading. All my trading interviews forced me to think on my feet and they certainly observed how I reacted to being challenged. That's not an edge though, that's just a trait that defines a good trader. An edge, in my mind at least, is a systemic reason your trading pattern does a service to the market, whether that be provision of liquidity or price discovery or both. Just showing up with the right attitude isn't gonna give you positive expectation though. All I was saying was that I would feel unprofessional going up to a boss and reporting that my edge was being psychologically prepared to trade a system.

 

[wrbtrader]

I see what you're saying, but having the right mentality is not an edge. Much like the military or sports, having the right attitude is a prerequisite, it's not an edge. Very few of the people on here who failed trading backtested systems actually had any edge to begin with. They didn't fail because they lacked the psychological wherewithal to trade, they failed because their systems either didn't work or had insufferable drawdown.

I agree with what you're saying about having the right attitude and "mental toughness" being a factor in trading. All my trading interviews forced me to think on my feet and they certainly observed how I reacted to being challenged. That's not an edge though, that's just a trait that defines a good trader. An edge, in my mind at least, is a systemic reason your trading pattern does a service to the market, whether that be provision of liquidity or price discovery or both. Just showing up with the right attitude isn't gonna give you positive expectation though. All I was saying was that I would feel unprofessional going up to a boss and reporting that my edge was being psychologically prepared to trade a system.

As I've documented, the word edge has been used and defined for many decades going back to the early 1900s. Simply, it has many different meanings which is why I also gave the example of a term I often seen used often at this forum...quantifiable edge for automation or system trading.

My point is that there seems to be two words involved...a word that's being attached to the word edge. Simply, there's obvious many different definitions of the word edge and the commonality in all of them is that those that have it...they outperform those that don't have it. Thus, it gets refer to as an edge.

In other words, if you're boss knows you're using an automated system or some kind'uv of a rule system...you're going to use words like quantifiable edge. Thus, there will be no discussions about a psychological edge. Yet, there are many traders out there that are not automated and some of them are profitable...

Why are they profitable or will you just do what others say here...they have no edge and its just luck (e.g. Paul Rotter) ?

Just the same, as documented by others in the trade journal section here and at many other forums...traders perform well with their trade method in simulation environment and the perform poorly as soon as they traverse to real money trading.

Surely not every single one of them had an insufferable drawdown that had nothing to do with their inability to manage the stress or pressure of trading with real money ? (you serious)

https://www.psychologytoday.com/blo.../201310/the-four-basic-moves-strengthen-focus

P.S. If luck is an important aspect of profitability...I would take being a lucky profitable trader than a losing trader any day of the week....wouldn't you ?

 

[Redneck]

but having the right mentality is not an edge

When the majority don't..., the BSDs do - and one is going up against all of em

Yes..., it is an edge

btw if psychology not so important - why do many firms keep a psychologist on staff / on retainer (rhetorical if you prefer)



=========================

having the right attitude is a prerequisite,

Yes.., but then so is this

good discipline, taking small losses, following their plan

So simple..., yet so few can do consistently..., over time

Wonder why that is (again rhetorical )

RN

 

[cjbuckley4]

I'm not gonna expend the effort for an ET argument on this. If you guys think psychology is an edge for you, then it's an edge. I concede. No ill will, I just have little interest in taking this thread all the way. I've said my piece about what I think the three edges are, now I'm peacing out.