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Do I have an edge?

  #6 (permalink)

charlotte nc
Trading Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
Posts: 391 since Jan 2015
Thanks: 71 given, 969 received

I 100% agree with this comment here. "If you don't know or at least cannot even argue what your edge is then you probably don't have an edge". In trading an edge can be though of as the specific betting logic that you use to trade with that successfully overcomes the house edge. If you don't know 1. What the house edge is that you are betting against, and 2. What specific strategy you are employing to overcome this, you likely aren't quite there yet.

But no worries, you can work on your current system / strategy and refine it until you can quantify if it has an edge or not. You just need to define the rules of your system and see how it performs over time.

Like others have said, 1 week is not quite enough to definitely tell anything. Often times systems with larger risk can perform amazingly in the short term but blow up on just a few big trades. This nets the entire performance out, but the outlier statistics don't appear right away. Systems with a risk / reward ratio of 2x1 or higher often have this issue... So you really need a ton of data to know if your system really works.

Systems that run great in trending markets but fail in flat markets or vice versa can often have outlier statistics that kill you in the end. If your sample is only during market conditions that strongly favor your system, this can also be misleading.

The best way to evaluate a system is to pick a few different market conditions.

1. Strong trend
2. Flat / Range
3. Medium (Some Trend, Some Range)

Test your system in all 3 market environments over a bunch of trades and see how you did. Then isolate your trade performance against all 3 market types individually, then analyze the correlation. Did you kill it during trends, but get killed during ranges? Was your fill rate good when the market was slow, but really bad when the market moved fast?

Once you start analyzing everything into different buckets like this, you will find the answers you are looking for.

Best of luck!


tpredictor View Post
If you make a profit over costs then that is the value of your edge. But, if you don't know or at least cannot even argue what your edge is then you probably don't have an edge. One of the problems, and I pointed this out before but system developers, myself included, basically will agree that statistics do not work well when applied to markets and then precede to use said statistics. Statistics can only invalidate systems that didn't work in the past.

Also, it is not just about having an edge, you need to know the variability of the edge to avoid blowing out. That's what gets most traders, who are over leveraged, it is not that they don't have an edge but that they cannot precisely bound the precision of their edge. One way to view the dynamics is basically there is a competition of leverage capacities. Leverage is very closely related to speed because typically as you increase your leverage your holding time will decrease. So, if you don't have enough leverage the it is similar to being too slow because traders with more leverage will be able to arbitrage whatever you see away. On the other hand, as you increase leverage and if you also use a tighter stop then you become more susceptible to gaming because it becomes easier for large traders, or the market as a whole, to run your stop and then even move to stage two which is to capture the edge you intended to capture.

In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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