What is the edge in your trade?

[marameo]

Expectation: How Much Does Your Trading Method Earn in the Long Run?

“What can you expect to earn on each trade on average over the long run from your investing decisions or your trading rules?” Or, as a blackjack player would say, “What is your edge?” A first step for the Turtles was to know their edge.
[...]
It didn’t necessarily matter how little the Turtles lost on any individual trade, but they needed to know how much they could lose in their whole portfolio. Eckhardt was clear: “The important thing is to limit portfolio risk. The trades will take care of themselves.”
[...]
Trading Your Own Account Tip #1: You need to calculate your edge for every trading decision you make, because you can’t make “bets” if you don’t know your edge. It’s not about the frequency of how correct you are; it’s about the magnitude of how correct you are.

The Complete TurtleTrader

 

[tommcginnis]

It’s not about the frequency of how correct you are; it’s about the magnitude of how correct you are.

You're {only} halfway there.

 

[MACD]

Trading Your Own Account Tip #1: You need to calculate your edge for every trading decision you make, because you can’t make “bets” if you don’t know your edge. It’s not about the frequency of how correct you are; it’s about the magnitude of how correct you are.

OK, Tip# 1 is now clearly stated, Thanks. So what are the next tips that will change the Statistical Odds that most Retail Traders lose their money? I am not trying to be coy or cute here, but it is tough enough to "Define Edge" and that is without the danger of Semantics when we are addressing the subject. It has been said that if one cannot explain their edge in just a few short sentences -- they probably don't have one.

Mine is simple -- Never trade based on charts, news, indicators or tea leaves to do determine if you should trade long or short.

 

[MACD]

OK, Tip# 1 is now clearly stated, Thanks. So what are the next tips that will change the Statistical Odds that most Retail Traders lose their money? I am not trying to be coy or cute here, but it is tough enough to "Define Edge" and that is without the danger of Semantics when we are addressing the subject. It has been said that if one cannot explain their edge in just a few short sentences -- they probably don't have one.

Mine is simple -- Never trade based on charts, news, indicators or tea leaves to do determine if you should trade long or short.

But I sure Like @tommcginnis Commit Picture.

 

[MACD]

OK, Tip# 1 is now clearly stated, Thanks. So what are the next tips that will change the Statistical Odds that most Retail Traders lose their money? I am not trying to be coy or cute here, but it is tough enough to "Define Edge" and that is without the danger of Semantics when we are addressing the subject. It has been said that if one cannot explain their edge in just a few short sentences -- they probably don't have one.

Mine is simple -- Never trade based on charts, news, indicators or tea leaves too determine if you should trade long or short.

"(Occam's razor (or Ockham's razor) is a principle from philosophy. Suppose there exist two explanations for an occurrence. In this case the one that requires the least speculation is usually correct. Another way of saying it is that the more assumptions you have to make, the more unlikely an explanation.)"

 

[destriero]

Someone posed an interesting question in another thread :
" I haven't seen anyone as yet explain to me in layman's terms what their edge is conceptually. "
which got me thinking "What is the edge in my trades?". I must admit, it really made me focus.

During certain months of the year I trade a lot of earnings calendars on various stocks, and it's been working out pretty good for around 3 years. So, what is my edge in this? It's theta decay. And here's how I like to see it:

Imagine I give you an ice cube and I have two cubes myself, all cubes being the same shape and size and we're in a room where the temp is constant throughout. I bet you money that your one will melt to completion much faster than my two.

Scenario 1) You put yours on a plate and I put mine on two separate plates separated by at least a foot. Result - all three cubes melt in the same time. No win for me.
Scenario 2) You put yours on a plate and I put mine two on top of each other. Result - voila! Yours melts faster than my combined two, cos they are keeping each other cooler.

Have I created an edge? I think so.

So, applying this to calendars : I give you $100 (an ice cube) and I have $200 (two cubes). You buy a Put priced at $1 expiring in 7 days. I can either buy two of these (place my cubes in two plates), OR, I choose to buy a Put which expires in 14 days time but which is priced at $2. All other things being constant, we all know which Put will melt away faster.

So, for calendars, I can see easily what my edge is. But for many other trades, it's a little more complicated. Sometimes, my edge comes from volatility, and sometimes it comes from the delta (for directional trades). Sometimes, I enter a trade thinking it's going to be winner because of theta, but volatility becomes the hero.
Sometimes, I cannot even easily explain where the edge comes from.

So, isn't all edge for retail traders coming from theta/volatility/delta? (Barring insider information, or ability to purchase options at a lower than market value due to some technical advantage etc etc.)

Just curious to see what others think.

Same strike double calendars!