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Is an edge important?

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I appreciate @TrendFollower comments on his long trade on gold and silver and it got me thinking. I read somewhere that it is important to have an edge in trading. An edge over other traders. I didn’t really understand why. If I shared my trading strategy and enough people copied it exactly, then would it become more successful in that it will become a self fulfilling prophecy?  Or would it become less successful because I no longer had an edge? 

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@Nelsy-Boy,

This is a very good question and thread topic. 

Most traders do not even realise that to be truly profitable over a period of time then one needs an 'Edge'. Many do not have an 'Edge'. In very basic and simple terms if you are making more losses than profits year on year then the chances are highly likely that as a trader you do not have an 'Edge'. Only a few traders make more profits than losses year on year. But an 'Edge' is more than that. It allows you to have a better chance than the other traders at being involved in those trade opportunities where you can make more significant and larger profits. An 'Edge' is not necessarily trading one asset class very well, especially when there are other asset classes which could have made you more profit. 

In my personal opinion, one must have a trading plan and trading strategy first and foremost before even attempting to gain an 'Edge'. Those who do not have this simply have very little chance in obtaining an 'Edge'. Once you have established a trading plan and trading strategy one needs to have a system in place where you trade according to rules that will give you a better chance than the majority of other traders in profiting from a particular trade.

If you follow what the books advise and all the other readers do the same and trade in a similar manner then the 'Edge' is no longer an 'Edge'. One must trade differently to the majority of the traders. It is about effectively identifying potential trades and the asset class they represent effectively. It is about trading both 'long and short'. It is about the rules used to enter and exit a trade.

Even if a trader has an 'Edge' it does not mean they will be 100% successful or profitable. It is merely increasing the odds of being successful in a trade and increase the probability in their favour of doing so. It does not guarantee 100% profitable trades. Nor can you simply go into a shop and purchase an 'Edge'. It takes a lot of time, effort, research and rule testing within a trading system to even come close to obtaining an 'Edge'. 

My understanding is a trading edge is when a trader can successfully identity those assets within various markets that will simply give them a higher probability of a profitable trade. This could be when certain assets are trending and trading with that trend. It is about increasing the chances of that trade being profitable than it not being profitable. Having an 'Edge' could allow a trader to actually identify when the particular asset is trending and then trading those trends in the direction of the trend and certainly not against it.

For me a trading 'Edge' is all about statistics and actually having a statistical edge hence why I am discussing probabilities. It is about identifying and then selecting those trades which have a higher probability of success. This is a lot harder than it sounds. The majority of traders will have no 'Edge' and will simply participate in more losing trades than winning trades or merely find reasons not to trade or present reasons not to consider certain assets and markets. For example there has been a fantastic opportunity to identify a strong downtrend in Cryptocurrencies. For those traders that truly have an 'Edge' they would have shorted Cryptocurrencies regardless of their beliefs on the asset class. They would have taken the opportunity to profit based on the price action and ignored 'experts', 'market noise' and profited when others simply found reasons not to enter the trades. 

An 'Edge' is important but the truth is the majority of traders will not have one. That should not mean one should stop trading. Many traders can go a lifetime and never find an 'Edge'. @Nelsy-Boy, you kind of go towards answering your own question. Those traders who are truly successful and profitable over their lifetime will have some sort of 'Edge' which means they enter and exit trades differently to the 'crowd' which is also profitable. If a trader knows that other traders or majority of are going to follow 'Elliot Wave Theory' then the big Hedge Funds and Investment Banks could devise a strategy to take advantage and profit from this behaviour. This could be their 'Edge' as they would make profits based on behaviour of the majority of traders following text book theory.

These are just my personal thoughts so I please urge members of the IG Community not to take any offence. 

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All depends on what you define as an edge @Nelsy-Boy.  There are plenty of people, including several on this Forum, who describe their approach as trend following or being a fast follower of the big boy professionals and market moving news breaks.  Is this an edge?  Perhaps it is about having a mechanism to identify when and how to execute against such a strategy and doing this well consistently (i.e. being profitable overall).  You sort of described the edge as being over other traders but is this right I wonder?  For trend followers surely it cannot be as the majority of the market money would be flowing into supporting the trend, wouldn't it?

There are many different strategies and methodologies out there and many are valid in the right hands but one thing that strikes me when reading about successful traders is that they have all created a methodology that suits their psychology, also they have practiced and honed this methodology until they have full confidence in it and themselves when using it.  This does not necessarily mean that they have invented something new, some of the best openly say they have borrowed and reformulated elements of well knows strategies into their system. It also doesn't mean they do not change and adapt their methodology and how and where they deploy it, they learn from each loss and adapt.

So perhaps the way to think about it is less about trying to develop an edge vs everyone else and more about self mastery and mastery of the markets you want to trade.  For me it isn't about trying to go against the well know methods, how can anyone know whether the market in general use EWT or Fibonacci or Wyckoff or trend following or technical indicators or whatever?  There are too many of them to figure out which the herd is using anyway.  In fact I would hazard that no single method or theory is dominant, there are sufficient vociferous naysayers on theories like EWT and Fibonacci on this Forum alone to evidence that.  We can't even agree on the existence of a Santa Claus rally...

So for me, if one needs an edge at all it is against the market that you are trading as a whole rather than other individual traders.  And here retail traders in general have one critical advantage vs the professionals, we don't have to be in the market at all but can pick and chose where and when we go in.  To leverage this edge we need a methodology that helps us identify these moments, one that suits us and NOT just by following someone, that is not trading.  If you can do this you will have the edge you are seeking.

Oh and it doesn't hurt to be contrarian and to think of possibilities that the mainstream either cannot conceive of or reject due to their inherent bias.  For example, if hedge funds are wedded to their trend following then they will consistently follow it off the cliff.  The big funds will be strong enough to reverse but the little guys will not survive the fall.  This behaviour is known as being sheep.  As another example If one is invested in something (be it a particular stock or a particular bias) then it is virtually impossible for them to countenance that thing failing, or even tolerate someone suggesting it might.  They stick with it until they die.  This is known as being an ostrich.

Most people will know about Bulls and Bears but perhaps have not heard of Sheep and Ostriches (I didn't make this up).  The Bulls and Bears don't savage each other (they are usually the same players who switch bias in time).  They savage and gore the Sheep and Ostriches.  Guess which category most retail traders fall into..?  Better to be a Bear or Bull and be wrong from time to time than a Sheep or Ostrich, they are by definition wrong!

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An interesting question! As @Mercury said I think we first need to define what someone means when they say 'an edge'. In my opinion everyone who trades MUST think that they have an edge otherwise they wouldn't trade. My reasoning is that if you thought you DIDNT have an edge, then you wouldn't trade. An edge can either be you thinking you know more than other people from a fundamentals perspective, that you trust your tech **** over market movements etc etc.

Also a massive fan of this quote...

On ‎16‎/‎12‎/‎2018 at 17:07, Mercury said:

Most people will know about Bulls and Bears but perhaps have not heard of Sheep and Ostriches (I didn't make this up).  The Bulls and Bears don't savage each other (they are usually the same players who switch bias in time).  They savage and gore the Sheep and Ostriches.  Guess which category most retail traders fall into..?  Better to be a Bear or Bull and be wrong from time to time than a Sheep or Ostrich, they are by definition wrong!

 

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@cryptotrader,

I do not quite agree that everyone who trades must think that they have an edge otherwise they would not trade. You would be surprised how many traders do not even consider the importance of an edge or realise about the necessity of an edge. 

I also do not agree that if a trader did not have an edge then they would not trade. That would imply that all traders who trade have an edge which is simply not true. Also the inference that I make from such a statement is that you think all traders on IG Community that actually trade think they have an edge. Again I am not sure this is the case.

It can take many years to gain an edge and sometimes 'deep pockets'. It can take many hours, weeks, months and years of hard work and still most do not get an edge.

I actually think that more traders do not have an edge than traders that really do.

When talking about having a real 'edge' then I think we are in the arena of professional traders who make if not millions then certainly hundreds of thousands on trades. That is only my personal opinion and I accept I could be wrong but they are my views.
 

Having an edge gives you a statistical advantage on the success / failure of the trade. For 'Algo - Black Box' traders one could argue that the edge they have is being able to execute trades faster than others in milli seconds / nano seconds. 

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Interesting and I think we need to define ‘edge’. For example even a statistical edge is an edge (51% of trades are right using the same risk reward ratio). 

If there is no edge in your mind then isn’t it just gambling? My thoughts are this...

you have a trade idea > you therefore think it’s right (otherwise you wouldn’t place a losing trade on purpose) > you think your idea is right and therefore others must be wrong (otherwise the price would be what you think it should be)

so for me it’s a Q of you thinking you’re right and others are wrong. You therefore think you have an edge over the competition. 

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Interesting points there and agree the need to define what we mean by an edge @PandaFace.  I read @cryptotrader post as people "ought to" have an edge, not that they actually do and that they would not trade unless they thought they did.  However it is clear that many people get into trading without taking the time to get educated and properly trained up before risking their hard earned cash (where else would you see that..?).  So rather it is that they SHOULD NOT trade until they have sufficient evidence from demo and testing that they do indeed have an edge in the form of a methodology that is working for them.  Working being the operative word, they have to actually be making money in the round (accepting that it takes time and losses are a part of honing your edge).

It is also clear, if you are involved in any discussion forums, that many people are entrenched in their views, even to the extent of denigrating other views and methodologies that may, inadvertently, call their edge into question, or make them question themselves.  This reflects a psychological issue with their own sense of self as a trader.  I quite enjoy an open debate about methods and theories, I always take something away from that, but when it degenerates into personal attacks I find it a distraction from real discourse and exchange of views.  Such people are closed minded and destructive, best avoided if you want to retain your edge from a psychological perspective.  More importantly they are not open to change or other views of the worlds and how it works.

Paul Tudor Jones said, a trader has to be able to see the world in a different way from other and to see the possibilities others can't or wont.  In 1987 hardly anyone else drew the similarities between 1929 and 1987.  '87 didn't actually turn into a depression, that is still to come, but the point is the few who did see '87 was on the cards made their bones on it.  The same is true of Steve Eisman, Nouriel Roubini et al on the Credit Crunch.

It is also clear that many traders stick with their strategies in the face of mounting evidence to the contrary, in the form of price action.  Whether this is because they can't bear to take the hit or just don't have a way to see and accept change doesn't matter.  These are the Ostriches I referred to previously (again not my term).

No strategy works all the time.  Trends change or get temporarily interrupted (retraced).  If you are following the herd in a trend no problem as it is suicide to try to stand in the path of a stampede.  The trick is to stay on the fringes so you can get out of the herd and avoid going over the edge of the cliff with them.  Being able to identifying those scenarios, however you do it, can been seen as having an edge.  If you do not have a method to do this you fall into the Sheep category.  You will make money for a while maybe but then give it all back, and possibly then some, as you follow the herd over the cliff.  

For sure traders enter a trade thinking they have a better than even chance of being right and at the point of entry but it is always at that point a gamble because you never know.  The thing successful traders do is be selective on when and where they take this gamble.  They seek to push the odds in their favour.  This is where a trading methodology, coupled with risk and money management kicks in.  But it has to be one that fits with your personality and psychology.  If you have this then it could be seen as an edge.  Bulls and Bears do this.  They aim to identify the trend and trend change and capitalise on this at the expense of the Sheep and Ostriches.

So the point I really agree with you on is that to have an edge you must think you are right and the herd is wrong.  You can be aligned to the herd once the trend is established but even within that trend there is whiplash to watch out for and the eventual end of the trend.  To think like this you have to be contrarian (not exclusively but at the right moments).  A good trader knows when to be contrarian and when to go with the herd.  Some go deep into fundamentals analytics (like the guys that we watch being interviewed).  This is their edge and few can do this, they are professionals.  For retail traders we need to find a different way to get an edge and some of it may include leveraging off information gleaned from such interviews or from services offered by the analytics or research providers to enhance our Fundamentals view point.

So I fully agree with PandaFace, if you do not feel you have an edge in anyway, and are not seeking to take from the herd when you trade, you are not trading, you are gambling. 

 

 

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@Nelsy-Boy,

I think one must be able to quantify their edge in numerical form. There must be some form of statistics applied to it so that the effectiveness of an 'edge' can be quantified. For example, there may be two traders who both an 'edge'. One must be able to work out who has a better 'edge' based on performance. So let's put the actual 'edge' to one side as you will get lots of different views and thoughts on this and you alone must decide what you agree with. It may well be that you find my views and thoughts are incorrect. Well that is fine as long as you have the information which supports why you think my views may be incorrect. 

Anyway, these are just my own thoughts on how to work out the performance of an 'edge' using hard numbers:

  • Total Number of Trades
  • Total Number of Winning Trades
  • Total Number of Losing Trades
  • Using the (above) will give you a percentage on winning trades and losing trades based on total trades
  • Your win percentage is calculated by taking the total number of winning trades and dividing it by the total number of trades.

Someone with an effective 'edge' should be able to consistently at any given moment have more winning trades than losing trades. However, this is where it gets complex. From a trend following perspective I could have completed 10 trades where 70% were losses and only 30% were winners. On the face of it, it may seem that I def. have no edge with results like this. Now what if consistently my 30% winners (let my winners run) were far more greater and profitable then my 70% losers (cut losses short) so that overall even with such statistics I was overall in profit at any given time? This point clearly shows how difficult it is to measure a trading 'edge' as we will all have different perspectives and views.

Now continuing from above (by the way this is a fascinating thread so thank you @Nelsy-Boy) lets add a layer:

  • The actual amount of profit generated from the winning trades
  • The actual amount of losses generated from the losing trades
  • Using the (above) will give you an overall profit or loss figure to see if you are a profitable trader however this in itself does not mean you have an edge

Keeping this nice and simple without the use of any unnecessary jargon and waffle it is important to remember that it is not important how much profit you made as someone who is wealthy and had a larger capital to trade is likely to execute larger trades thus larger profits are likely to be possible. 

The Gain vs Loss Ratio is what is important and must be calculated in order to attempt to quantify how effective an 'edge' one truly has. 

  • The win to loss ratio will be your total trading profits divided by your total trading losses.
  • It is calculated by taking the total amount gained by winning trades and dividing it by total amount lost by losing trades. This ratio can then be used with other statistics to truly define how effective an edge one really has. 

Often certain traders will sacrifice potential returns to capture a high winning percentage. For someone following 'Trend Following' principles this is not always the case. Many traders who following 'Trend Following' principles are often fine with a lower winning percentage if their winners are substantially greater than their losers. This is why the Win to Loss Ratio is important as if the latter is the case then that will be factored into the Win to Loss Ratio.

I hope this makes sense as I have tried to keep it simple and easy to understand. I personally think the above are the most important metrics that a trader needs to measure their own performance and they should be treated with the utmost importance.

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Wow. This whole thread is edge of the seat reading (get it?!). Love it all. So interesting and understandable. Although some slightly different views the crux is the same. An edge, or whichever way you would wish to label it, consists of a variety of things mentioned in this topic such as solid methodology, profitable trading plan and exceptional risk management. I feel, therefore, it is important to have an "edge". Thanks @TrendFollower @Mercury @PandaFace @cryptotrader

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I would just like to add that yes backtesting is important when fine tuning a trading system to establish an 'edge' but I believe that forward testing is crucial to confirm if that 'edge' truly exists and to really confirm quantification of that 'edge'.

 

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