What constitutes edge / why is my system working?
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lovethetrade
What constitutes edge?
Profitability over the long-run.
Assumptions: Markets are perfectly competitive.
Why is my system working?
Probably because it hasn't been time-tested
Profitability over the long-run.
Assumptions: Markets are perfectly competitive.
Why is my system working?
Probably because it hasn't been time-tested
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From my 2 years of trading, I found my 90% yearly return, the answer was always in my arbitrage of risk across time periods. In this business, be it options, stock, futures or currencies, we get paid for taking and dropping RISK. In rare occasions, there's mispricings of the instrument. This is harder to find for a sustainable period of time especially in something like trading, but it still exists, and once you find it, load it up like no tomorrow! I have better luck find mispricings of distressed homes and used cars in the Dallas market than in the options/stock markets.
Without knowing too much about your strategy, you may be taking on risk for a short period of time and unloading it before the risk manifests itself. The other side who dropped the risk probably was unloading a different risk profile off their books.
Maybe they just dont know. You'd be surprised how "unsmart" hedge fund guys are. Most have good college pedigrees, but havn't had the freedom to trade on their own and thereby come up with their own strategies. The other reason is that your strategy may not be scalable to large capitals; to the multi-million dollar range that the large funds seeks. Or the strategy itself is high capital that allows several participants to constantly perform and still not lose the edge.
But nonetheless, good luck to you. Your pursuit to seek the truth on why it works will help you find refine more strategies.
Is it because if you transfer the edge to others, it will quickly be arbitraged away and the edge gone? Supply and demand will also erode the advantage.
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Morning InTheMaking,
You brought up a good point regarding "load it up like no tommorow".
Should traders always seek to scale up "like no tommorow " when they found an edge? Even if the edge showed good returns on a few trades in history. I belive the answer is yes. Because finding an edge that exist for the past +5 years is increasingly challening. Why not look for short term edges? For example, something that was profitable 15 out of 20 trades. On the 21 trade setup, enter 5 contracts ( or most trader can afford ). I think this is a good idea and better risk or chance of winning big money.
Just my thoughts and random thinking.
Hi @SimpleMeLike
I didn't mean to *load up* on the edge or strategy, but to load-up on a mispricing.
A good mispricing arbitrage is riskless. In 2016, I bought a debit spread of +1P @ 21 / -1P @ 20 on a $24 stock for a 5c credit!!! See that I got paid $5c to essentially buy a put! So, at $1.4 commissions this was $3.6 of riskless profit. I bought a 100 contracts then. If I had truly known how rare this happens, I would've bought 100k contracts, :/ I have yet to find something like this. And this particular mispricing lasted for maybe an hour till that debit spread was worth +5c. So my 100 contracts that I got $360 profited to $720 and ballooned to $1200. What if I had bought 100k contracts? 720k profit in an hour?
Anyhoo, regarding an edge, this constantly appears in the market. But as traders, we have to train ourselves to hunt for them. In 2 years of trading, I have found 15 different strategies, 7 of which have disappeared away in the market, but just need to hunt for more. Trading is like any business. The opportunity will last only as long as the market will allow it. Once you find it, allocate enough capital to the strategy and once you see if weakening, divest away from it. I havn't found any new edges in the last 1 month. However, one of my trader friend has been using a calendar that's achieving him 84% return. I'll start trying them next week.
Thanks for the response,
Why didn't you invest 100k ( or whatever max you coils afford at the time) contracts in your example above?
So the key is knowing when to scale up on a proven edge.
first of the trader wants to be compensated, and the best way to be compensated is to keep the mouth shut and account open
also, upon learning the method others may be better traders, or more faster ones than the inventor himself
only in theory, in practice if the edge is based not on the artificial and temporary market situations or rules, but on fundamental nature of the market itself, nothing should affect it
but as i mention above the trader (his capabilities) is also a factor besides the edge
why do people even do such strange things now? I think this is a little strange, but at the same time, important trades in the future. important for those to whom money is very important. I thought so because I recently read one of the chapters on https://samploon.com/free-essays/can-money-buy-happiness/ about whether money can buy happiness. It turns out that it is better to be sad in a convertible than in public transport. and the usual way to earn so much money is impossible. so I'm glad that you were able to master NFT, I'd be happy to figure it out myself. this is great