What defines an "Edge".

monoid said:
A chart is nothing but a visualization tool. A visualization tool can be used to visualize data within the confines of any model. One builds a visualization tool for a model not the other way around -- stating that the data points does not show in a chart means that the visualization tool is not properly defined for the said model.
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monoid said:
Experience has taught me that whenever I make sweeping statements that generalizes an entire subject, I am usually wrong for I have most likely not considered the positions of others who might have a different yet valid points of view. Further, having experience trading OTC fixed income, credit derivatives, and exchange traded options and futures, and having been exposed to some great minds, I have seen and do understand how people trading different product classes with different motives within each product class can and do think differently -- trying to say one way of modeling is the right way is just a shame!

All the best.

Regards,
Monoid.
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IMO, recognition and acceptance of the truth of these two quotes by all forum participants would elevate ET to an unrecognizable level of intelligence and civility.
 
garachen said:
I guess this merits explanation. The concept is simple but the implementations are varied and complex. I'll hit it from a few angles.

Convexity is positive gamma. An example is the upward curvature of an option payout function. When you buy an option you are always long convexity and short theta (time). You lose money every day that you are supposed to be able to pay for by extracting value from the gamma by delta hedging.

Ok. That's technical but should make sense to an option trader. Here's another way. Imagine that everyday there is a product with this payout: if ES is down at the close you lose 8c. If ES is up you make 10c. Assume ES follows a random walk. How much should this product cost? 1c. Trading isn't really about guessing overall market direction, it's about synthetically constructing scenarios where you can buy the above payout structure for 0c or less. There are many different ways to apply this but they should all force you to closely examine the reason for why you are getting paid. Manual traders should be expert at doing this. People can spot 'movement dislocations' across products much easier than a computer can. It's too much a priori knowledge to program into a trading strategy.

Charts:
I know I've voiced my opinion on this before. Charts have the following problems.

1) They cause your brain to see patterns that aren't really there and that have no predictive power.
2) They cause people to start to personify the product they are trading. Saying it 'wants' to go up or down. This distorts your perception and corrupts your intuition.
3) People start to get overconfident in their trading by looking at a chart and thinking in terms of 'good setup' or 'great setup'. Then they take too much risk.

I'm not saying it's impossible to trade off charts. So far, the academic literature has shown that chart reading with standard indicators when applied systematically does not provide any value. But academics don't really know or care about the depth of the problem space and make LOTS of simplifying assumptions that have meaningful impact. For example, they are not going to want to account for the changing relationship dynamics between different products or news events or anything else that is messy and subjective.

But this is my standard. Suppose you are a decently paid engineer making $150k. Given the risk of trading and the disruption of your career and the higher incremental taxes, you should be making at least 2x trading than you were in your job. That's $300k. And you've got to get to that number rather quickly. I'd suggest that's a very tall order for a chart reader. Almost nothing I do and nothing I care about watching is going to show up on a chart.
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Garachen, Ghost_of_blotto, Rallymode,

Thanks for your responses.

Without wanting to attract a million PMs my way I believe that I may already have an edge.

The edge I have found is a price dislocation as Garachen mentioned above and is actually caused by large order flow being generated on different products around market moving events. It normally lasts for no longer than a minute at the very most until price returns to value. I believe it to be what Garachen describes as "calming the panic".

It is by no means at all a chart based reoccurring pattern and only can be found to occur during certain conditions. For example I know when to look for its occurrence but it takes other exogenous variables to align for it to happen and therefore by its nature it is infrequent offering a handful of trades per month but these are of a very high probability outcome. I am also fairly certain that other inefficiencies of a similar form could be located in other products but using the same grounding as it is to some degree microstructure based.

What concerns me is that because price is being returned from out of value to in value other market participants are already trading it or perhaps arbitrage algos are picking up on the mispricing and retuning it to value so in theory the available liquidity is already being consumed. Another reason for my concern is why does this edge already exist. Seeing as algos are ever more present in the markets inefficiencies are becoming few and far between so why does the dislocation I am talking about still occur?

My thoughts are that algos are turned off during highly sensitive market events and it is when they are rearmed that mispricing are traded back to value. Could it also be that due to its reliance on exogenous variables and its low frequency that it has not been detected by algos?
 
redbaron1981 said:
What concerns me is that because price is being returned from out of value to in value other market participants are already trading it or perhaps arbitrage algos are picking up on the mispricing and retuning it to value so in theory the available liquidity is already being consumed. Another reason for my concern is why does this edge already exist. Seeing as algos are ever more present in the markets inefficiencies are becoming few and far between so why does the dislocation I am talking about still occur?

My thoughts are that algos are turned off during highly sensitive market events and it is when they are rearmed that mispricing are traded back to value. Could it also be that due to its reliance on exogenous variables and its low frequency that it has not been detected by algos?
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You can bet that others are trading it too. Watch for the algo patterns. How is the liquidity being provided. Have you researched the microstructure? Who are the market makers, you can bet they know about it. Unless its a very obscure product in this day and age chances are someone bigger and much faster then you is already in it. If you have found something like this then kudos keep quiet and exploit it as much as possible.

The only way to know for sure if its legitimate or if you are just being fooled by randomness is to ask garachen if he has a seat on that exchange. If he does then its likely not a true mispricing, if he doesnt then he may just look at it and eat your lunch.;) lol

In all seriousness, you shouldn't base your longevity as a trader on something like this.
 
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If you know who and why will drive your position after your entry (what groups of traders), you have the edge.
 
Is possession of an edge defined by being a systematic winner (high % win rate) or to be non-systematic winner (low % win rate)?
 
JSSPMK said:
Is possession of an edge defined by being a systematic winner (high % win rate) or to be non-systematic winner (low % win rate)?
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Win rate is not really relevant. It's possible to have a sub 40% win rate and still have a positive profit factor. If you've found something that you can repeat over and over to make consistent money with over a long period of time, that's an edge.

We know a lot if not most traders fail long term, so if you can be consistently profitable for 3, 5, 10+ years I'd say you've found an edge. I am sure some people are going to argue they are just getting lucky or it's always 50/50, but you could trade for 30+ years and be profitable every day, week, year and they would still claim the same thing, so debating vs that is useless and holds no value.
 
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