What is an "edge"?

[volpri]

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.

I don't believe the market is random. But if by random you mean just taking any ole trade regardless if it is one of your setups or not then the process for such a random trade is exactly the same. You have to look at the contexts and say "if I enter right now" can I structure this trade (by assigning and adjusting reward, risk, probability) to give me a positive traders equation? I will sometimes do this on the fly by the seat of my britches so to speak. I may not see a setup I usually would take but just by how price is dynamically moving around I believe I can make 3 points before I would get stopped out at 6 points SL. So I assign 80%

So,
80x3=240
20x6=120
240>120 = positive traders equation

Boom I am taking this trade.

There is high probability I am going to get 3 points before I would lose 6 points. Doesn't look like a good R:R structure but it probably will end up being a good R:R because it is a high probability trade and that usually means ACR (actual risk) will be small as opposed to the initial risk of 6 points. But it also means if it is high probability I best not count on it being big reward so grab them 3 points when I can. Why? the fact that probability is high can only mean that much of the move has already taken place. There are exceptions like in very strong BO and I hit it just right.

You can get one or two of the variables in your favor but rarely will a trader get all three in their favor like in the perfect trade:

high probability, big reward, low risk (the perfect trade)


Look, bottom line assigning probability and using the traders equation is a great tool to help render a high win rate. It is a simple exercise that can better a traders results. Who in all honestly just hopes for a low win rate? I know the arguments. win rate means nothing...bla bla...I happen to believe win rate is good for the soul. After all, who wants to lose over and over then once in a while win even if ending up in the long haul, profitable. Why not win ALOT and also end up profitable? That is my take on it and how I see it. Not wanting to lose can be a psychological stronghold and wreck a traders account to be sure but to create losses that you have to battle with psychologically because of poor trades and a lack of considering probability is nonsense to me? Not me Jose. I'll take winning over losing EVERY time. Beside after entry, any PT can easily be adjusted for a bigger reward or a smaller reward, than the initial reward, if the dynamic of situation warrants doing so as the trade unfolds.

 

[deaddog]

Look, bottom line assigning probability and using the traders equation is a great tool to help render a high win rate. It is a simple exercise that can better a traders results.

Well that was a long read.

I don't see the equation as being a definable edge. Too many "if you think" & "you assign a probability" parts of the equation for me to be able to nail down something I can use consistently.

Who in all honestly just hopes for a low win rate? I know the arguments. win rate means nothing...bla bla...I happen to believe win rate is good for the soul.

I happen to believe a good equity curve is better.

but to create losses that you have to battle with psychologically because of poor trades and a lack of considering probability is nonsense to me?

There is a difference between a poor trade and a losing trade. I like to think all my trades are good trades. More than 50% have a bad outcome. However I manage to make a consistent return.

I don't battle with losses. They are part of trading. It's a probability thing. What is important is how much you win and lose, not how many.

 

[volpri]

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.

Well that was a long read.

I don't see the equation as being a definable edge. Too many "if you think" & "you assign a probability" parts of the equation for me to be able to nail down something I can use consistently.
I happen to believe a good equity curve is better.

There is a difference between a poor trade and a losing trade. I like to think all my trades are good trades. More than 50% have a bad outcome. However I manage to make a consistent return.

I don't battle with losses. They are part of trading. It's a probability thing. What is important is how much you win and lose, not how many.

Whatever floats your boat. That is the most important thing. It has to suit you. Traders are always looking for certainty in setups but we can never be certain. Even our best efforts can be wrong and we are all trying to outguess the market. I go through the process to help me define the pressures and find a probability figure. Others may find the process too tedious. That is fine. I usually don't have to worry about giving out my secret sauce cause I really don't have any. LOL. Most traders are not going to do what I do although I wish they would as it would make things even more precise and better for me. Most traders want to stick to simple setups that they consider are good setups and just let the "shit hit the fan" and see what happens. I totally understand that. Trading is not easy. It does take a lot of mental energy and effort. Each trader has to find what works for them and the implement it. It is a very hard task to give clear definition and certainty to something that is so uncertain, but not random, like the markets.

Happy trading!

 

[SimpleMeLike]

Whatever floats your boat. That is the most important thing. It has to suit you. Traders are always looking for certainty in setups but we can never be certain. Even our best efforts can be wrong and we are all trying to outguess the market. I go through the process to help me define the pressures and find a probability figure. Others may find the process too tedious. That is fine. I usually don't have to worry about giving out my secret sauce cause I really don't have any. LOL. Most traders are not going to do what I do although I wish they would as it would make things even more precise and better for me. Most traders want to stick to simple setups that they consider are good setups and just let the "shit hit the fan" and see what happens. I totally understand that. Trading is not easy. It does take a lot of mental energy and effort. Each trader has to find what works for them and the implement it. It is a very hard task to give clear definition and certainty to something that is so uncertain, but not random, like the markets.

Happy trading!

volpri,

People need to listen to you man. You know what you talking about.

I had 2 losses in a roll today. A trading buddy ask me "what happen, what did you do, are you going to change something"

I said NOPE, I am not changing a damn thing. Good Trades, can and will go bad. We are trading probabilities, you will lose on trades.

 

[deaddog]

I go through the process to help me define the pressures and find a probability figure.
..........
Happy trading!

How is that working out for you.

Is it really an edge? (Edge = being able to see something in the market in time to be able to exploit it.)

 

[deaddog]

When someone ask to me what is my edge that's why I have difficulties to answer question. As time passes you learn to not care rest of the world opinion that's why mostly I answer this question simple and short as much as I can say "My system."

but there is a lot more than this...

I've heard somewhere that if you can't define your edge you don't have one.

My system is a good definition if you can define the system.

 

[SimpleMeLike]

How is that working out for you.

Is it really an edge? (Edge = being able to see something in the market in time to be able to exploit it.)

Just back test an idea to see if it have an edge and make money.

The challenege is finding the idea

 

[Tradex]

What is an edge?

As far as technical analysis is concerned, an edge is simply some statistical abnormality that you can profit from consistently in the financial markets.

The most obvious one is that markets trend, in other words markets move further than expected, from a purely statistical and mathematical point of view.

They produce what mathematicians call "fat tails".

Theses fat tails allow trend-following systems to extract money from the market.

 

[destriero]

Tradex explains how trend vol is fat tails

 

[Laissez Faire]

An edge is when there’s more money in your account at the end of the day, week, month and year.