<i>"Well, there's a difference between day trading day after day, year after year, making money and holding bonds for 30 years, no?"
"No. Money is money. If I make 20% a year in bonds or daytrade and make 20% a year adjusting for taxes and costs, it's the same thing." </i>
Austin, you need to go back to school dude. Bonds in the 1980's traded at 15% coupon yields and traded at 30 cents on the dollar. And yes, people held them for 30 years. A little fyi, in the mid 1980's, a lot of guys retired from the cbot trading floor because rates were so high and they could lock in 15% to 20% for the rest of their career and they walked away from the business. Bonds actually traded at those yields for about 5 years. Perhaps your knowledge of history is just weak, but Paul Volker came in and raised rates that high to kill the inflation from the 1970's and it worked and he set off one of the greatest bull markets in history that only came to an end just 2 years ago.
worthless analogy: many traders have made 20% annual thru lots of different "edges" but no one on earth has ever bought & held 30yr bonds for 20% annual returns over time. Please! If that were even remotely possible, short-term trading would not exist.
See comments above.
A professional gambler's "edge" is mental ability to count cards in blackjack or assess % win probabilities in poker. By mav's definition of "edge" there ain't a single WSOP champion who has an edge, and lots of those players have made eight-figures in their careers.
Counting cards is NOT the same thing as charting moving averages. LOL. Good Lord. Guys counted cards because there were a FINITE number of cards!!!!!! The WSOP is a horrible analogy to poker. Poker has a fixed number of players and a fixed pot. Again, any game that has a finite structure to it can be modeled quite easily as there are a limited number of outcomes and choices.
Mav, your personal definition of a trader's "edge" means literally nothing to anyone else. It is merely your own personal opinion, that's all.
It's not an opinion, it's math. That same math is the reason every one of your combines crashed and burned. If you had a real edge Austin, no rules in the world could keep you from passing the combine because you could use the Kelly Criterion to optimize your leverage given your edge and the risk TST allows you to take. But you can't use the Kelly formula if you don't have an edge. That dog don't hunt.
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Topsteptrader
- Thread starter deaddog
- Start date
there are 10 races a day at the track,8 horses per race, 80 places to make a bet, the racing form is a guide, the novice places 15 bets, the pro who uses it like a cheat sheet places 4 bets,wins on 3, your ability to read the racing form is only an edge if it is better than most, the track knows this ,as does vegas, as does goldman, jpm and ms,the banks the fed vs foriegn currencies, the US vs the rest of the folks still pegging things to the dollar..start from the elephant in the room and work back...failure to do this reduces your edge if there is such a thing..imagine that eric clapton has more knowledge about chords than the beginner,one day that beginner may know more ,but for now etc etc....
Obviously the numerical value or the mechanics of how to derive expected value is not an edge. You got to give others at least that much credit. I thought it was obvious when I used 'expected value' as a proxy for edge, in that an edge occurs only when the expected value is 'greater' than purchase price .
What I am saying is that your artificial categorization of an edge is limiting and unnecessary. It's ignoring the very premise of competitive advantage - the judgement that something is worth more than it's current price. The mechanics of doing so is the weighted probability exercise of figuring out expected value. But the 'quantifiable' number does not mean anything unless your assessments about probability are correct - The quality of your decisions expressed as a 'quantifiable' result. Merger arb is a prime example of this. There is nothing 'objective' about merger arb. It's all about decisions.
Do you realize what you are implying - that good decision making does not earn alpha. And that we are all trading a perfectly efficient market.
If we take a step away from trading vocabulary of options, synthetics and what not, things become a little clearer. Target has an edge over it's competitors because of it's size - they can squeeze their vendors on margin. That is an edge. Fine. This falls under your category of 'hard edge'. But every season, Target buyers have to decide what to stock on the shelf. These decisions are arrived at through taking all kinds of data and running them through various probability estimates, to then arrive at expected values. The highest expected value product goes on the shelf. The edge is realized only if it was a true edge - i.e. if their probability estimates were realistic. It's all about decision making.
You are relegating 'edge' in trading to a limited scope. The entire business world outside trading does not limit 'edge' in this way.
Saying expected value is just 'one way' to price assets, is like saying that drinking is just one way to consume milk (the other being intravenous). Of course solely beating an index is not an edge. There is all kinds of fun stuff called risk and variance. Therefore, I qualified that with 'risk adjusted' returns
I knew you would be on my case otherwise. I enjoy your contributions on this site - your recent post about the importance of tracking currencies was excellent. But man, I cannot understand why you are trying to make something as simple as positive expected value so convoluted.
It does not matter whether information is derived from squiggly lines or from balance sheets, what matters is the way in which the information is used to make decisions. Positive expected value, edge and good decision making skills are the same thing.
There are countless axioms in trading and gambling. One general rule is, if you suspect you may not have an edge, trade or gamble as little as possible. If you do have an edge, trade as much as and as often as you possibly can. This is how guys can walk out of a casino with cash in hand. Not because they had an edge, but because they bet as little as possible. One of the many mistakes newbies make is over trading and overleveraging. Daytrading futures allows you to do both. The results speak for themselves...
Obviously the numerical value or the mechanics of how to derive expected value is not an edge. You got to give others at least that much credit. I thought it was obvious when I used 'expected value' as a proxy for edge, in that an edge occurs only when the expected value is 'greater' than purchase price .
No, man, this is frustrating. Expected value allows one to optimize risk. It's basically saying, I don't know the future, I only know the range of outcomes. What is the optimal allocation I should make towards risk to maximize by net present value. A hard edge is KNOWN. If I'm trading Class A shares against class B shares and they should trade at the EXACT SAME price and they are off by .03 and my cost is .01 then the arb WILL make me .02. There is NO expected value here. Listen,this is very important to understand. I would not be repeating myself. This is absolutely crucial to know an understand the difference because they are NOT interchangeable.
What I am saying is that your artificial categorization of an edge is limiting and unnecessary. It's ignoring the very premise of competitive advantage - the judgement that something is worth more than it's current price. The mechanics of doing so is the weighted probability exercise of figuring out expected value. But the 'quantifiable' number does not mean anything unless your assessments about probability are correct - The quality of your decisions expressed as a 'quantifiable' result. Merger arb is a prime example of this. There is nothing 'objective' about merger arb. It's all about decisions.
One can add value by making decisions but that is not edge. Edge is suppose to be limiting by it's very definition. LOL. Think about it, if edge was broad and available anywhere and everywhere then it's value would be worthless. Think about supply and demand.
Do you realize what you are implying - that good decision making does not earn alpha. And that we are all trading a perfectly efficient market.
Man I've got some really bad news for you. Over 90% mutual fund managers add ZERO value to their mutual fund performance by under performing the SP 500. I believe those numbers are similar for hedge fund managers. All very smart and educated people who all employ very smart and educated people making all sorts of wise and intelligent decisions and proving absolutely no value. Yeah man, there ain't that much alpha out there. I mean there is some, but dude it's really small.
If we take a step away from trading vocabulary of options, synthetics and what not, things become a little clearer. Target has an edge over it's competitors because of their size - they can squeeze their vendors on margin. That is an edge. Fine. This falls under your category of 'hard edge'. But every season, Target buyers have to decide what to stock on the shelf. These decisions are arrived at through taking all kinds of data and running them through various probability estimates, to then arrive at expected values. The highest expected value product goes on the shelf. The edge is realized only if it was a true edge - i.e. if their probability estimates were realistic. It's all about decision making.
Not exactly. Target does not make money by making decisions. Target and all retailers in a competitive market compete on cost. The marginal producer sets the market price for a good. The marginal producer is the one with the highest cost. Target makes money by making sure their marginal cost = their marginal revenue. Most retailers don't have pricing power so they compete on cost. The way they do this is through economies of scale. They optimize their supply chain and overweight their allocation to capital vs labor. That was actually not a good analogy to the trading industry. Retailing has nothing to do with probabilities. In fact, it's almost the opposite.
You are relegating 'edge' in trading to a limited scope. The entire business world outside trading does not limit 'edge' in this way.
Again, these are really bad examples. Businesses don't function like trading unless you want to compare retail financial services to business.
Saying expected value is just 'one way' to price assets, is like saying that drinking is just one way to consume milk (the other being intravenous). Of course solely beating an index is not an edge. There is all kinds of fun stuff called risk and variance. Therefore, I qualified that with 'risk adjusted' returns I knew you would be on my case otherwise.
I'm trying to get you to understand the variables you are working with here. A trader cannot rely on expected value if there are an infinite number of outcomes. You only know the result after the fact. And if there is no term structure to the possible pricing distribution then you have an infinite number of possibilities.
So look dude, here is the deal. As a directional trader, throw this concept of edge out the window OK? Your job is to take on risk. Try to look for value. In other words if you think of risk as a stand alone asset, your goal should be to optimize it as much as possible. Meaning, you have to buy it, you have no choice, just try to pay as little for it as possible. Spread your bets. Keep your costs down. And try to recognize the current environment you are in and allocate your capital in the most efficient manner possible given that environment. This is not about having an edge. Every product, every environment, every cycle is going to offer you an index return based on those parameters. Just try not to over pay for it. That's the best advice I can give you.
I enjoy your contributions on this site - your recent post about the importance of tracking currencies was excellent. But man, I cannot understand why you are trying to make something as simple as positive expected value so convoluted.
It does not matter whether information is derived from squiggly lines or from balance sheets, what matters is the way in which the information is used to make decisions. Positive expected value, edge and good decision making skills are the same thing.
No, man, this is frustrating. Expected value allows one to optimize risk. It's basically saying, I don't know the future, I only know the range of outcomes. What is the optimal allocation I should make towards risk to maximize by net present value. A hard edge is KNOWN. If I'm trading Class A shares against class B shares and they should trade at the EXACT SAME price and they are off by .03 and my cost is .01 then the arb WILL make me .02. There is NO expected value here. Listen,this is very important to understand. I would not be repeating myself. This is absolutely crucial to know an understand the difference because they are NOT interchangeable.
What I am saying is that your artificial categorization of an edge is limiting and unnecessary. It's ignoring the very premise of competitive advantage - the judgement that something is worth more than it's current price. The mechanics of doing so is the weighted probability exercise of figuring out expected value. But the 'quantifiable' number does not mean anything unless your assessments about probability are correct - The quality of your decisions expressed as a 'quantifiable' result. Merger arb is a prime example of this. There is nothing 'objective' about merger arb. It's all about decisions.
One can add value by making decisions but that is not edge. Edge is suppose to be limiting by it's very definition. LOL. Think about it, if edge was broad and available anywhere and everywhere then it's value would be worthless. Think about supply and demand.
Do you realize what you are implying - that good decision making does not earn alpha. And that we are all trading a perfectly efficient market.
Man I've got some really bad news for you. Over 90% mutual fund managers add ZERO value to their mutual fund performance by under performing the SP 500. I believe those numbers are similar for hedge fund managers. All very smart and educated people who all employ very smart and educated people making all sorts of wise and intelligent decisions and proving absolutely no value. Yeah man, there ain't that much alpha out there. I mean there is some, but dude it's really small.
If we take a step away from trading vocabulary of options, synthetics and what not, things become a little clearer. Target has an edge over it's competitors because of their size - they can squeeze their vendors on margin. That is an edge. Fine. This falls under your category of 'hard edge'. But every season, Target buyers have to decide what to stock on the shelf. These decisions are arrived at through taking all kinds of data and running them through various probability estimates, to then arrive at expected values. The highest expected value product goes on the shelf. The edge is realized only if it was a true edge - i.e. if their probability estimates were realistic. It's all about decision making.
Not exactly. Target does not make money by making decisions. Target and all retailers in a competitive market compete on cost. The marginal producer sets the market price for a good. The marginal producer is the one with the highest cost. Target makes money by making sure their marginal cost = their marginal revenue. Most retailers don't have pricing power so they compete on cost. The way they do this is through economies of scale. They optimize their supply chain and overweight their allocation to capital vs labor. That was actually not a good analogy to the trading industry. Retailing has nothing to do with probabilities. In fact, it's almost the opposite.
You are relegating 'edge' in trading to a limited scope. The entire business world outside trading does not limit 'edge' in this way.
Again, these are really bad examples. Businesses don't function like trading unless you want to compare retail financial services to business.
Saying expected value is just 'one way' to price assets, is like saying that drinking is just one way to consume milk (the other being intravenous). Of course solely beating an index is not an edge. There is all kinds of fun stuff called risk and variance. Therefore, I qualified that with 'risk adjusted' returns
I knew you would be on my case otherwise. I'm trying to get you to understand the variables you are working with here. A trader cannot rely on expected value if there are an infinite number of outcomes. You only know the result after the fact. And if there is no term structure to the possible pricing distribution then you have an infinite number of possibilities.
So look dude, here is the deal. As a directional trader, throw this concept of edge out the window OK? Your job is to take on risk. Try to look for value. In other words if you think of risk as a stand alone asset, your goal should be to optimize it as much as possible. Meaning, you have to buy it, you have no choice, just try to pay as little for it as possible. Spread your bets. Keep your costs down. And try to recognize the current environment you are in and allocate your capital in the most efficient manner possible given that environment. This is not about having an edge. Every product, every environment, every cycle is going to offer you an index return based on those parameters. Just try not to over pay for it. That's the best advice I can give you.
I enjoy your contributions on this site - your recent post about the importance of tracking currencies was excellent. But man, I cannot understand why you are trying to make something as simple as positive expected value so convoluted.
It does not matter whether information is derived from squiggly lines or from balance sheets, what matters is the way in which the information is used to make decisions. Positive expected value, edge and good decision making skills are the same thing.
This entire exchange arose not because of a lack of understanding about what a 'hard edge' is, but because your are distinguishing between soft edge and positive expected value. And now I see the heart of your argument and where the disagreement lies. Expected Value is not an 'optimal' allocation of risk to maximize NPV. Expected value IS the NPV. Risk is already accounted for in your discount rate. If you want to lower your risk tolerance, simply adjust the discount rate. You are treating expected value as a mechanical exercise of allocation. I am treating it as value - the same thing you have been asking me to keep in mind.
No I don't know the range of outcomes - that is precisely what 'expected value' will tell me - what the most likely range of outcome is and whether it is favorable enough for me to take a position to uncover value. It is not about allocation, but about establishing the range in the first place.
Man I've got some really bad news for you. Over 90% mutual fund managers add ZERO value to their mutual fund performance by under performing the SP 500. I believe those numbers are similar for hedge fund managers. All very smart and educated people who all employ very smart and educated people making all sorts of wise and intelligent decisions and proving absolutely no value. Yeah man, there ain't that much alpha out there. I mean there is some, but dude it's really small.
Forget mutual funds. Now you are using their poor performance in the same way that academics use them to discredit intelligent speculation. I am not equating good decisions with being smart and educated. I am equating good decisions with earning alpha. That such decisions are rare has no bearing on the 'expected value = good decision' argument. In fact, in a low barrier to entry/ mega scalable industry, it has to be rare.
Not exactly. Target does not make money by making decisions. Target and all retailers in a competitive market compete on cost. The marginal producer sets the market price for a good. The marginal producer is the one with the highest cost. Target makes money by making sure their marginal cost = their marginal revenue. Most retailers don't have pricing power so they compete on cost. The way they do this is through economies of scale. They optimize their supply chain and overweight their allocation to capital vs labor. That was actually not a good analogy to the trading industry. Retailing has nothing to do with probabilities. In fact, it's almost the opposite.
The argument was not about 'pricing power'. Most products are commodities. It was about maximization of Dollar sell through per unit of shelf space. That is all about probability, i.e. expected value. The range of outcomes cannot be boxed in. It is as uncertain as determining whether the new 'Grocery' expansion has an expected value greater than the clothing rack it is going to replace.
I'm trying to get you to understand the variables you are working with here. A trader cannot rely on expected value if there are an infinite number of outcomes. You only know the result after the fact. And if there is no term structure to the possible pricing distribution then you have an infinite number of possibilities.
So look dude, here is the deal. As a directional trader, throw this concept of edge out the window OK? Your job is to take on risk. Try to look for value. In other words if you think of risk as a stand alone asset, your goal should be to optimize it as much as possible. Meaning, you have to buy it, you have no choice, just try to pay as little for it as possible. Spread your bets. Keep your costs down. And try to recognize the current environment you are in and allocate your capital in the most efficient manner possible given that environment. This is not about having an edge. Every product, every environment, every cycle is going to offer you an index return based on those parameters. Just try not to over pay for it. That's the best advice I can give you.
I am looking for value! Whether the value is derived by 'hard' or 'soft edge' is immaterial. But I will wager that in the history of value creation, value created through good decision making has far surpassed value created through a 'hard edge'.
My NPV is agnostic to how the stream of cash flows was created - or how the means to create it was defined.
I'm not understanding your example . You are talking about basing a long term investing return over one entry in bonds versus intraday trading where the base starts over everyday.
Do you believe discipline and money management can be an edge ?
What about pattern recognition ?
Sure computers are faster than humans but I am talking about an subjective edge obtained by 10's of thousands of hours spent trading one market ?
How can one even begin to quantify a subjective edge ?
Statistics have shown that certain personality types have a much higher success rate in trading and others are not suited at all.
If trader a is this type and trader b is not that type then why is that not a partial edge for trader a ?
I disagree with your view that an edge has to be black and white.
This is why engineers almost always fail at trading.
Say a trader A has a edge/system/voodoo/random guessing that produces $100 per Es contract per week over their career but the max drawdown can reach $1000 per contract anytime. This is a 5.7% return based on current full contract value. His monthly nut is 4k. Now this trader allocates $5000 per contract and trades 40 contracts with a 200k account knowing at anytime they can hit $1000 per contract drawdown and be down 20% total on their capital. Using this example they will generate 208k profit from trading.
Trader B has the same exact results but he only has 10k to trade with so he can only trade 2 contracts using same risk parameters and only makes $200 per week. Only problem is his monthly nut is 4k so he ups his size to 5 contracts to make his weekly nut and when the $1,000 drawdown comes he is blown out.
Does trader A not have a definable edge to you just from capital and money management ?
I think the majority fail in trading because they don't look at the probabilities correctly from the start and come into it looking at how much they can make instead of how much they can lose before winning resumes.
Maybe not so much an "edge" but a skill. A skill in the sense that everyone knows they are supposed to do something but human emotions prevent some people from following them (cutting loses for example).
Definition of skill: the ability, coming from one's knowledge, practice, aptitude, etc., to do something well.
I have not had a losing month in 2 years. If someone asked me what my "edge" is I would NOT say I have superior knowledge of markets, a better understanding of TA, a super fast computer, etc. But I do feel that I have a good instinct for the market and have incredible discipline and money management skills. Those skills help me be a successful trader.
Does Lebron James have an edge over other players or is he just better? He is the same height and weight as many NBA players but is unquestionably a superior player than 99.99% of all other players. His edge is he is more skilled. How he got that superior skill is a whole other topic. Now, if there was a player that had average skills as compared to other NBA players but he was 8 feet tall, I guess you could say his edge would be his height.
I'm definitely not saying I am the Lebron James of trading!! But I am saying that one person can have superior skills in some aspects of trading that can make them successful.