What is an "edge"?

schizo

schizo

I would like to return to my root and ask what I perceive as the most profound question: What is an edge? As a perma-noob, I'm always told that I must have an edge to succeed as a trader. So what is an edge exactly? Can it be defined? Is it quantifiable? Can it be repeated? Is it static or dynamic?

So far, here's what I've manage to come up with:

1) Edge is a pattern. It could simply be a price pattern on the chart, or it could be a behavior pattern (eg. the interaction between me and/or the market).
2) Edge must be repeatable. It can be repeated, replicated, duplicated each and every day.
3) Edge has a high probability of success.
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4) Good entry is a must. Good exit is a must.
5) Good entry is useless, however, if your timing is off.
6) There is no good exit. There is only a proper exit (eg. let your winner run, cut your losses).
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you will get some answers and most of them will be wrong.... because most people are looking in the wrong place.

an edge must NOT be self-defeatable...

e.g. you are co-located and therefore can catch orders faster;
but retail doesn't have that kind of resource... but you can still win... edge is simply that you understand the market better than everyone else... check my thread 'trading is easy'... it's all about market understanding and logic.

now here is why most people are looking in the wrong place - they back test, find patterns etc... these things are temporary.. eventually enough people find the same thing, they crowd trade and become vulnerable to a counter-strategy.... I guess you can survive this way, by constantly finding patterns and trying to be 1 step ahead ... but that sounds like a lot of work.
 
schizo said:
So what is an edge exactly?
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Here is an answer from one of the great legends of this forum.

Maverick74 said:
There are two types of edges. I have discussed this at length on this thread but I'll go over it one more time. There are structural edges (market maker bid/off spreads, technology, cost of doing business and information flow). These are implicit edges that are not really debatable. The other edges fall into what is known as "theoretical edges". They are not implicit. A lot of guys like to think technical analysis falls into that category. I personally don't, but what the hell do I know. LOL.

To me, when I hear the word edge, it implies to me some "advantage" one person has over another. The first category I listed is pretty obvious. If someone can trade on the bid and offer and you can't, that is an advantage. I like to talk my book and say that understanding price action is an edge. Simply because most people can't do it. When I was a tape reader for listed stocks, that was an edge. Again, most guys could never learn to read the tape. So if you had that skill and they didn't, it was an edge. One could make the argument that being able to do quick math in your head can be an edge especially if one has to trade complicated option positions or spread positions.

Edges should be able to prove themselves quantitatively over time. If I claim my quick math skills is an edge and I trade on the floor but over time I'm not making money, then I guess it isn't really an edge. If I use information flow to make money and it doesn't prove to be profitable over time, it probably is not an edge. An edge should have the probabilities working for it over large data samples.
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Edge is transactional / market makers - capturing the spread

or

Preemptive price vector sustainability indication...

charts patterns resolve in either bullish or bearish trend. Trend Following..

chart patterns consolidative, mean reversion where support or resistance is adhered to..

Informational edge, privy to news event a few seconds before anyone else...

Infrastructure edge, co locating or using high processor count to apply machine learning on the fly...
 
dozu888 said:
you will get some answers and most of them will be wrong.... because most people are looking in the wrong place.

an edge must NOT be self-defeatable...

e.g. you are co-located and therefore can catch orders faster;
but retail doesn't have that kind of resource... but you can still win... edge is simply that you understand the market better than everyone else... check my thread 'trading is easy'... it's all about market understanding and logic.

now here is why most people are looking in the wrong place - they back test, find patterns etc... these things are temporary.. eventually enough people find the same thing, they crowd trade and become vulnerable to a counter-strategy.... I guess you can survive this way, by constantly finding patterns and trying to be 1 step ahead ... but that sounds like a lot of work.
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For the OP? A billion times the above statements.

Read that post again, if you are trying to define what an edge actually "is".

I'm sorry, but an edge ... almost by definition ... cannot be a pattern. if it was a "pattern" that people can identify? Then how is it an edge? Everyone is staring at the same screen. You have almost zero edge over anyone else, if everyone is looking for the same thing you are seeing.

And when it comes to patterns? Something I have told aspiring traders for years? Patterns, mean that you are already suffering from the bias problem of Apophenia.

And all I'm doing here, is reiterating the above post.

But at the expense of being "wordy".

Again.

An "edge" is something that gives positive expectancy over an iteration, and is repeatable; and is not dependent on some 'setting' being correct. It's something, as a Partner of mine likes to say? Is REAL. A REAL phenomenon. Not an Apophenia/Indicator induced phenomenon.

And by GOD ... it can't be 982.4846 on some indicator, and you think the indicator set to 982.4846 is the "right" setting but 982.4856 is "wrong". In fact, in some of our work with testing strats (this gets into something referred to as Noise Ratio), you SHOULD set your "metrics" to different settings, to see if your Edge is still present.

It cannot be dependent on a "setting" of some metric. You should be able to 'slide' your Process to the left, and to the right? And you still have positive expectancy over an iteration.

THAT ... might be an edge.

Maybe
 
As has been said: in pit-parlance, the "edge" is getting a "free look". Paying the offer at 5's just before it leaves (gets lifted) and goes 5's bid. Putting you instantly at break-even if the 5's bid holds.

In popular trade education sales parlance: An Edge is suggestive and mass marketed to mean some secret. Most of their marketing targets hope that this edge is in the markets comes in the form of a combo of indicators and parameters.

I've know a few good traders. They fit into 3 groups:

1. Those that say "if you don't know what your deg is, you don't have one."
2. Those that have never heard of the term "edge." They just make money.
3. Those that know what it means, but really don't care. They tend to say "my 'edge' is being good at trading, which took me a long time, fulltime".

Personally, my edge today was picking just about every small swing top/bottom for a few ticks in a quiet session watching other correlated markets tick up and down, setting the pulse. My anti-edge got me on my very first trade opportunity of the day: pulling my resting order 1 tick away from the biggest swing of the session, when I was 1st PIQ.... because I was scared after a recent messy losing day.

Conclusion: edge is being good at trading, and is made up of a million stitches. One example, edge is not letting past bad trading emotionally get in the way of good trading today.

Or maybe it is a Hull Moving Average on a Renko chart?
 
For me Google definition of the word “edge” would be sufficient:
A quality or factor that gives superiority over close rivals or competitors.
 
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