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How to develop an edge?
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How to develop an edge?

  #11 (permalink)
Market Wizard
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kickmic View Post
i don't think of edge like this at all.
a set of circumstances, scenarios, patterns, call it what you will align prompting the trader to make a trade.
the trader who really is exercising his/her edge accepts the outcome of the trade as uncertain. However, the trade is made on the basis of having made the same trade (including the risk management and profit management strategy) hundreds of times before, and that over a large sample base produces a positive outcome.

the edge ceases to exist when the outcome over a large sample base no longer produces a positive outcome, hence the need for continued review of groups of trades.

I interpret the original post as learning an approach to the market that when repeated over a large sample base produces a positive outcome.

I like your approach. However, I have learned that most refer to edge as some superior method.
Edge could be higher level of probability, it could be a large account withstanding high fluctuations or even discipline attained through constantly applying the method despite consecutive losses (most can't).

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  #12 (permalink)
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rhuz View Post
@mattz i don't say that about indicators just because others say so. I say it because indicators based on price are lagging and at the end is just another way of looking at price, that's my bias or way of thinking and i don't think that indicators are what drives price up, down or sideways. People use them, it's fine that's what works for them.

Thanks all for your comments.
Rhuz

Yes, they are lagging, if you use traditional technical analysis. If you read flow, then it happens in real time.
But, neither are predictive by nature, therefore stating that they don't cause prices to move is a given.
All we are looking for are probabilities.

Lagging indicators like MAs are still very useful for short term traders because they can put context for medium and long term trends. They put context in place.
They are not useless, and if you deem something as such, it is our of your own real time screen experience.
Anyway, I don't mean to dispute your belief, just to show the other sides of the equation.

Matt

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  #13 (permalink)
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mattz View Post
Yes, they are lagging, if you use traditional technical analysis. If you read flow, then it happens in real time.
But, neither are predictive by nature, therefore stating that they don't cause prices to move is a given.
All we are looking for are probabilities.

Lagging indicators like MAs are still very useful for short term traders because they can put context for medium and long term trends. They put context in place.
They are not useless, and if you deem something as such, it is our of your own real time screen experience.
Anyway, I don't mean to dispute your belief, just to show the other sides of the equation.

Matt

And I agree with you 100% I look at indicators too for context I don't think they are useless just that I don't think in them as you say in the traditional way like for entries, I'm not closed to any approach and really appreciate all the comments

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  #14 (permalink)
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rhuz View Post

For the indicators part for @Underexposed indicators are what you use and that's your bias or way of thinking so that's what works for you. For @mattz i don't say that about indicators just because others say so. I say it because indicators based on price are lagging and at the end is just another way of looking at price, that's my bias or way of thinking and i don't think that indicators are what drives price up, down or sideways. People use them, it's fine that's what works for them.

Rhuz

There is a definite anti-indicator bias on this site. Personally I think it is because everyone is looking for a silver bullet indicator that will be the money maker.

I spent years looking at indicators and how they work...I literally spent over 10 years to get where I am today. Most people here that have discarded indicators have spent maybe a few months using them in ways that I discarded half a decade ago. Don't get me wrong there are some pretty dodgy ways that indicators are used but if you follow my journal I am not shy of showing how I use indicators to my advantage.

It is NOT my BIAS....it is my trading STRATEGY. It is how I have been able to live a comfortable life trading equities for over 10 years....through one of the biggest financial crisis in trading 2008-2009. I have never blown an account...ever, I have never had to go back to work since I went all-in around 2004.

It is a trading strategy... not my bias and I do discuss it in detail in my journal, free to all that wish to look at it.

You have not found your strategy to my way of thinking.

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  #15 (permalink)
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My response might be controversial but here goes....

I can't stand the word 'edge'. There can be no edge in a liquid market that has a tick wide bid/ask spread. No matter what method you choose to pull the trigger, your success will be based entirely on trade management. IMO, good traders succeed because they have a successful strategy to manage their trades after entry. It is not their 'brilliant method' of selecting trades, it is their management of the position after they are filled.

Find a way to enter trades that makes sense to you (the method won't matter). But most importantly, learn how to manage the position after entry.

I'll give you an example of the importance of trade management and the unimportance of method of entry. I know of a very good trader who is somewhat of a guru in his chosen area of technical analysis (rhymes with park-it-snowpile).

However in his trading room, which is very transparent with trades called in advance, half the guys can't make any money. A room member tracks the trades religiously, and they are marginal at best. BUT, some guys, including the guru-moderator, are very successful.

How can that be? It is all in the management of the trades post-entry. Not doing stupid things like moving your stop to BE, for example.

The guru is a really great guy and really tries to help. He believes he can teach his entry methods to help people learn how to trade, but he is successful not because of his method. He is successful because of his trade/money management. He knows how to trade!

I firmly believe that for any currently successful trader, I could give them random entries and - because of their ability to manage a trade - they would be just as successful.

The particular method is unimportant, but the confidence in their method compels good traders to pull the trigger every time their 'setup' appears. But it is their superior trade management - not the 'set-up' - that makes them the $$$$$.

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  #16 (permalink)
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gfmatt View Post
My response might be controversial but here goes....

I can't stand the word 'edge'. There can be no edge in a liquid market that has a tick wide bid/ask spread. No matter what method you choose to pull the trigger, your success will be based entirely on trade management. IMO, good traders succeed because they have a successful strategy to manage their trades after entry. It is not their 'brilliant method' of selecting trades, it is their management of the position after they are filled.

Find a way to enter trades that makes sense to you (the method won't matter). But most importantly, learn how to manage the position after entry.

I'll give you an example of the importance of trade management and the unimportance of method of entry. I know of a very good trader who is somewhat of a guru in his chosen area of technical analysis (rhymes with park-it-snowpile).

However in his trading room, which is very transparent with trades called in advance, half the guys can't make any money. A room member tracks the trades religiously, and they are marginal at best. BUT, some guys, including the guru-moderator, are very successful.

How can that be? It is all in the management of the trades post-entry. Not doing stupid things like moving your stop to BE, for example.

The guru is a really great guy and really tries to help. He believes he can teach his entry methods to help people learn how to trade, but he is successful not because of his method. He is successful because of his trade/money management. He knows how to trade!

I firmly believe that for any currently successful trader, I could give them random entries and - because of their ability to manage a trade - they would be just as successful.

The particular method is unimportant, but the confidence in their method compels good traders to pull the trigger every time their 'setup' appears. But it is their superior trade management - not the 'set-up' - that makes them the $$$$$.

I think you hit the nail on the head! Although trade entry bares some importance it is basically irrelevant compared to trade management. Execution then becomes key as it is a useless endeavor if one was to constantly change and refine trade management.

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  #17 (permalink)
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Here, have an edge...

To me, an edge is a statistical edge, something that works better than a coin flip. Add in good money management, position sizing and you're off to the races.

So, even though you didn't ask, I'm going to give you an edge. You can use it or not, but the historical results of using this edge are

win rate: 52.63%
profit factor: 2.85
max drawdown: -10.88%
ratio avg win / avg loss = 2.67

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The rules?
  1. There are three MAs
    1. regime MA(100)
    2. fast MA(5)
    3. slow MA(20).
  2. Enter long when fast MA crosses above slow MA when price is above the regime MA. Exit if fast MA crosses below slow MA
  3. Enter short when fast MA crosses below slow MA when price is below the regime MA. Exit if fast MA crosses above slow MA

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Trade this on QQQ using WEEKLY bars.

OK, so I gave you an edge. There are plenty of criticisms people will now fling at me
  1. it's parameters are curve-fitted (I didn't do any optimization: 5, 20, 100, those are pretty nice round numbers, about 4-5x multiples of each other)
  2. weekly bars? that's not enough trades. i want to scalp futures to make $500-$1000 a day of income
  3. really, an MA cross strategy? that doesn't involve fibonacci numbers, digital signal processing, or artificial intelligence, that can't possibly work.

Here's what I like about this edge
  1. it has historical precedence that it works
  2. it's success can be explained by the characteristics of the market it trades
    1. NASDAQ stocks are heavy-weight tech and bio/pharma, which tend to have long momentum-driven runs in price because they can provide investors rapid growth as well as high volatility
    2. it follows a larger trend and only takes signals in the direction of the trend
    3. the higher time frame minimizes the damage slippage and commission can inflict on a trader's account

This is just one edge, one market. You can find similar trend-following edges on other markets. Diversify across markets, rinse repeat.

Then, diversify strategies. Try a mean-reversion/range-bound market strategy. Which markets tend to exhibit this sort of behavior? And during which seasons?

These are all knowable and repeatable. The edges are there, you just have to find them and trade them in a way that meets your personal lifestyle (time demands, time of day, frequency of trades) and how you deal with risk/loss. If you don't know what your psychological make-up is, just try some different ways of trading, you'll eventually find which ones best fit you. Nobody can tell you which way works for you. You have to just do it to figure it out. It's like dating: lots of rejection, but over time you figure out what kind of mate/partner you are wanting and which ones to avoid.

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  #18 (permalink)
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shodson View Post
Nobody can tell you which way works for you. You have to just do it to figure it out. It's like dating: lots of rejection, but over time you figure out what kind of mate/partner you are wanting and which ones to avoid.

I really appreciate your response and loved this last part. Thank you very much for the explanation .

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  #19 (permalink)
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While it is quite easy to "money manage" your way to "Broke" --- while betting with a positive expectation ----there is absolutely no way to "money manage" your way to long-term profitability if your bets have a negative expectation. The entire concept is plain silliness. It reminds me of some of the advice given in numerous misguided books on "how to beat the casino".

And just because someone claims (on the internet) that they've had a history of success exploiting pseudo-patterns in past stock prices or with some combination of indicators -- does not mean they are a model by which to pattern yourself by or take advice from -- it just means they have "yet to go broke".

And when each does, you can rest assured that there will be 3 more internet advice-givers to take the place of each.

Money management will allow you to enjoy complimentary meals, drink expensive liquor, get you a whore, sleep in a suite, give misguided advice to your fellow players -- and do all of this for much longer than some others may enjoy --- but under no circumstances does "money management" have the capability to give you a positive expectation.

Peace,
Paige

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  #20 (permalink)
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Paige View Post
While it is quite easy to "money manage" your way to "Broke" --- while betting with a positive expectation ----there is absolutely no way to "money manage" your way to long-term profitability if your bets have a negative expectation. The entire concept is plain silliness. It reminds me of some of the advice given in numerous misguided books on "how to beat the casino".

And just because someone claims (on the internet) that they've had a history of success exploiting pseudo-patterns in past stock prices or with some combination of indicators -- does not mean they are a model by which to pattern yourself by or take advice from -- it just means they have "yet to go broke".

And when each does, you can rest assured that there will be 3 more internet advice-givers to take the place of each.

Money management will allow you to enjoy complimentary meals, drink expensive liquor, get you a whore, sleep in a suite, give misguided advice to your fellow players -- and do all of this for much longer than some others may enjoy --- but under no circumstances does "money management" have the capability to give you a positive expectation.

Peace,
Paige

Actually every trader from multi-billion dollar hedge funds, professional money managers, and even profitable retailers are all "waiting to go broke". +EV or not every system and equity curve has volatility. Due to the non normal distribution of the markets as well as the infinite possibilities of volatility, every system will go broke given a fixed account size. The larger the account size relative to trade size, the smaller the historical equity curve volatility, and the higher the average trade expectancy all increase the N trades it takes until such a event (call it black swan if you like) occur it is inevitable. As your N trades approach infinity, your chance to go broke approaches infinity.

Really your job is to retire before you reach that point.

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