What is an "edge"?
- Thread starter schizo
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Mostly right RaV;
except 93% right= can be wrong 6 or 7/8 months in a roW + I can profit from that. [2] An ability to read Market Makers Edge/Joshua Lukeman with his6 month charts maybe can help, maybe not.[3-7]NOT saying any trader/inVestor could be right 93% on a 5 minute chart but it would/could be easy to be wrong 6-7or 8 months in a roW on a 5 minute charts....................................... Wisdom is profitable to direct [ Edit note, this post isn't really about what IBKR calls fractional trading, but that link also popped UP/ LOL]
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Knowledge and understanding - that's an edge.
Wipe your slate clean and start observing what's going on in front of you. Make observations. Check the validity of your observations and be honest with yourself. Use or discard. Move on. Test. Test. Test. Research. Make a plan/trading model based on your findings.
Learn the market as it is - not how you think it is or how you think it should be.
Create (statistical) records of your findings.
Takes a long time to get there...
Wipe your slate clean and start observing what's going on in front of you. Make observations. Check the validity of your observations and be honest with yourself. Use or discard. Move on. Test. Test. Test. Research. Make a plan/trading model based on your findings.
Learn the market as it is - not how you think it is or how you think it should be.
Create (statistical) records of your findings.
Takes a long time to get there...
For me, it's all about pattern recognition:
1) Detect profitable patterns.
2) Predict the outcome:
2a) Anticipate (eg. profit target)
2b) React (eg. money management)
3) Rinse and repeat
No offense, I don't think he will respond to your post.
@raVar left (was banned by??) ET after a run-in with @destriero.
this is a strategy
I don’t believe you need an edge in the sense of a secret setup but you do need a mathematical advantage to consistently extract profits from the market. A true edge is actually just a mathematical advantage. I will gladly tell you mine. It is the traders equation. I use it to structure a trade. Any trade. Here it is:
Probability of winning x the reward needs to be significantly greater than probability of losing x the risk.
It needs to end in a positive number. You can read more about this in my journal.
If a trader is relying on some secret setup as his edge that can be fleeting and may soon disappear. Or if market conditions change it may become useless.
Knowing the probability of winning might be considered an edge.
How do you figure out the probability of any random trade being a winner.
I know the probability of my set-ups being winners. I know what my risk is. I don't really know what the reward is because I don't have a set target. My profit exits are based on a trend ending.
Contexts, the larger and the more immediate helps to set the probability figure. It is basically one's best guess that price will reach their initial reward before it will take out their stop. In your case since you don't have a initial reward I suppose you would have to just consider; what is the probability of this going into a trend in my favor before it would hit may SL. And assign a price in your favor where you would consider a trend to have been started and then use that as a calculation for probability. I would use the price for reward the price you think is where you could say the trend has started. Exits are always contingent on the unfolding dynamics. I don't necessarily exit at my initial target. Once in I will move it for more profit if I think there is a good chance I will get more as the trade unfolds. But to structure a trade that gives a mathematical edge you need some sort of min reward figure. Look at it this way, if price doesn't have at least a min reward possibility with decent probability then it probably won't make it to your trend possibility. So just assign a temporary reward. For you the calculation would be:
probability assigned x min reward expected if there is going to be a trend > probability of loss X risk.
So plug in some hypothetical numbers:
your min reward (the points at where you would consider it to be a trend. Lets say it is 8 points. Your risk is four points. Ok assign probability.
What is the probability of price reaching 8 points before it would hit your SL? Lets say you think, after looking a both contexts, that there is a 60% chance of it reaching your 8 points before it would hit your SL
Therefore,
60x8=480
40x4=160
480>160
So a positive traders equation.
Once your are in the trade reward can be adjusted to whatever. It is just you need a mathematical edge to enter the trade and not just a setup, IMO. There are three variables: probability, risk, reward. I believe all three need to be considered and not just saying I am shooting for a 3:1 reward to risk or an 8:1 reward to risk. It is OK to think in those terms but what is the probability of it actually turning out that way? That question should be asked and answered in my opinion. It would help eliminate bad entries on good setups. See two identical setups. One wins and one loses. Why? the odds favor that taking a good look at the larger and immediate context in which the trade setup was seen will be found to have been a factor. So, probability of a trade being successful is dependent in a great part upon the contexts.
Lets look at another example: Say you decide if price reaches 10 points from your setup entry you will consider it is starting a trend. But you believe, based on the present volatility, that you are going to have to use a 8 point stop. But you have some doubts after looking at the context that price will make it to 10 points from your setup entry before it would hit your SL. So you assign 40%
40x10 = 400
60 x 8 =480
400<480 so a negative traders equation. That doesn't mean you can't take the trade it just means there is a bigger chance of it failing and your SL getting hit. Are you then willingly to take that setup or you gonna skip it? I know some traders argue take every setup in your system or you skew the results. But not every setup is equal even if it is the same exact setup. Probability based upon context has something to say about it.
See, the argument of probability is directly connected to the contexts, both the bigger and the smaller. Say you trade PB's and enter once the PB has shown it has ended. So, look at two PB's both are basically the same. Entries are the exact same as defined per your rules. But one is found to be a PB in a broad Trading Range. The other is found to be a PB in a strong bull trend. Which PB is LIKELY to render a better trend trade?
Context helps with probability.
And why would you want to take a setup that has a poor probability of being successful? You can take trades that have a low probability of reaching your reward assigned IF that min reward is BIG and the probability of it failing is high but the risk is little and the trade renders a positive traders equation.
For instance: You think there is a strong reversal about to happen just because of the way price is acting. So you figure IF the reversal is successful it will likely render me a big reward. And because price has been in bear trend but has stalled and showing signs of reversing into bull trend the risk is small. So, lets say you figure you will risk 2 points. If the trade goes in your favor you will likely get a 20 point rewards. But is has low probability but you want to take the trade and just see. So you assign 20%.
20% x 20=400
80% x 2= 160
400>160 so a positive traders equation even though the probability of it panning out is very low. But it is still a reasonable trade to take. And if it pans out well...…..great. If it doesn't your out 2 points.
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