Three Sources of Edge

Chuck Krug

Chuck Krug

Three Sources of “Edge”:
1 Analytical edge
Investment framework; smarts/IQ; experience; technical expertise (in a
sector/security/geography/etc.)

2 Psychological edge
Willingness to bear pain and delay gratification; avoidance of (or ability to
exploit) fear and greed; lack of interest in one’s popular perception;
willingness and ability to go against the crowd when appropriate

3 Institutional edge
Properly aligned incentives; optimal size and structure; ability to withstand
pain; searching in the optimal places; having the right clients
 
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Chuck Krug said:
Three Sources of “Edge”:
2 Psychological edge
Willingness to bear pain and delay gratification; avoidance of (or ability to
exploit) fear and greed; lack of interest in one’s popular perception;
willingness and ability to go against the crowd when appropriate
More...

I like number 2 the best. You gotta have foresight to see the Greater Picture....the future...the complete chart of the day; and not be frazzled by temporary bumps.
Psychological edge was kind of displayed on more than one occasion in the movie Trading Places 1983.
Patek_Philippe_5102_J.jpg
trading_places.jpg
 
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My two cents on the three sources of edge:
1. Liquidity provision.
2. Arbitrage.
3. Powerful enough fundamental information to create an informational asymmetry.

These three edges have withstood the test of time.
 
cjbuckley4 said:
My two cents on the three sources of edge:
1. Liquidity provision.
2. Arbitrage.
3. Powerful enough fundamental information to create an informational asymmetry.

These three edges have withstood the test of time.
More...

I would edit these.

1) Liquidity or order flow (market maker). Important to make this distinction as you need to have priority to capture bid/offer spreads. Arbitrage also falls in this category as it's a function of being able to capture bid/offer spreads. You usually can't get an arb by lifting offers or hitting bids.

2) Costs: Not just commissions or borrowing rates but also technology since technology is a means to lower costs.

3) inside information or information flow: So this can be the illegal variety but it can also be just knowledge of customer flow. For example who is trading what and at what size. You don't necessarily need to be a market maker but just have access to this info.

These are the three edges. Psychology and all that crap is not an edge. In fact it's more likely a negative edge in that it's usually believed by delusional people.
 
Chuck Krug said:
Three Sources of “Edge”:
1 Analytical edge
Investment framework; smarts/IQ; experience; technical expertise (in a
sector/security/geography/etc.)

2 Psychological edge
Willingness to bear pain and delay gratification; avoidance of (or ability to
exploit) fear and greed; lack of interest in one’s popular perception;
willingness and ability to go against the crowd when appropriate

3 Institutional edge
Properly aligned incentives; optimal size and structure; ability to withstand
pain; searching in the optimal places; having the right clients
More...

I believe in all those types of edges you've listed. In the recent years I've been developing a more understanding of #2 especially after reading all the statistic research involving decision-making and cognitive for people in occupations and athletics that need to make split second decisions.

In fact, more wall street firms are investing in the research and understanding of behavioral finance...to better understand why people make irrational financial decisions.

This interest me as a discretionary trader especially considering most discretionary traders list their trading problems via their inability to remain discipline, make appropriate decisions when under stress, emotional control and inabilities to deal with the realities of trading. Ironically, most of these same traders don't believe in psychology as an edge. :banghead:

Yet, I see a lot of retail traders (mainly forum users) use the phrase "quantifiable edge". Would that be a sub-group of "analytical edge" or a completely different group that you've overlooked ?
 
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wrbtrader said:
I believe in all those types of edges you've listed. In the recent years I've been developing a more understanding of #2.

Yet, I see a lot of retail traders (mainly forum users) use the phrase "quantifiable edge". Would that be a sub-group of "analytical edge" or a completely different group that you've overlooked ?
More...

#2 doesn't exist. LOL.
 
Maverick74 said:
I would edit these.

1) Liquidity or order flow (market maker). Important to make this distinction as you need to have priority to capture bid/offer spreads. Arbitrage also falls in this category as it's a function of being able to capture bid/offer spreads. You usually can't get an arb by lifting offers or hitting bids.

2) Costs: Not just commissions or borrowing rates but also technology since technology is a means to lower costs.

3) inside information or information flow: So this can be the illegal variety but it can also be just knowledge of customer flow. For example who is trading what and at what size. You don't necessarily need to be a market maker but just have access to this info.

These are the three edges. Psychology and all that crap is not an edge. In fact it's more likely a negative edge in that it's usually believed by delusional people.
More...
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.
 
Maverick74 said:
Willingness to bare pain and fade moves is not an edge. In fact, it's what 98% of the people on this site do. LOL.
More...

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
 
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