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I don't go in chat rooms much, but was in one this week where the discussion turned to the viability of an edge. Then a question was posed along with a quote from some great trader (i forget who), and it was along the lines of this:
"Do we truly have an edge when trading the markets, or is the belief that we have an edge that keeps us trading successfully?"
Let me preface this by saying I have always understood the need for an edge, wanted an edge in my trading, and tested for an edge. However, lately I have been given some serious thinking to whether us traders truly have a market defined edge... or is it just the belief that we have an edge, and so we trade accordingly?
Imagine this scenario in any market you want...
Trader flips a coin - heads long, tails short - every trading day, exactly 30 mins after the open
The trader then has the ability to do the following:
Decide how many contracts/shares to trade.
Decide the amount of money they want to put at risk. ie. stop loss exit
Decide their trade plan for managing this position for the rest of the day, week, month, etc.
Decide if they want to scale out of the trade, or exit completely at a certain target.
(And there are many more controllable choices, but I'll just list four basic ones)
So now the trader is long or short a market of their choice, based on the random flip of a coin. Yet they have an immense array of CHOICE in how they want to manage that trade. And they will have a new trade each day to manage 30 mins after the market opens. Could that trader be profitable?
I have a hunch that traders, have much less of an edge than they think... and perhaps no statistical edge at all... or the edge goes away, and their success is simply a matter of how they manage the trade. Similar to the coin flip example above. Its worth pondering...
Do traders use technical information that they have not tested? Do traders use technical indicators without any hard evidence that they provide any advantage whatever in forecasting markets?
The problem in evaluating a technique (coin flip) or any tool (order flow widgets) without hard empirical tests is often our eye sees what it wants to see.
In my mind entry and exit goes hand in hand. You can't make any profit on a consistant basis if your entry is badly defined. Samething for your exit.
Your question sounds "personal." Do "I" think "I" could be profitable with a coin flip entry, yes I do. That might sound grandiose to many readers but I strongly believe as you've stated, ",,, they have an immense array of CHOICE in how they want to manage that trade."
I also believe you can never take the same trade twice. Sure you can enter trades at exactly the same time each day, why, because time is the only measurable factor that doesn't retrace, but the context or the market state will always be different (to some degree). The "array of CHOICE" may seem unlimited, but IMO they are all based on Time, Price and Volume.
I believe you've "thrown down the gauntlet," I also believe it would be an incredible learning experience for anyone willing to accept the challenge, but I remind you, on a personal level.
I have a couple setups with time based entries, but obviously the direction of the positions are not based on the flip of a coin. Taking a trade with a time based entry actually anchors something that can be evaluated, time. In your example this one simple anchoring point could spawn a vantage point to assess the context or market state each time the coin is flipped. When the "array of CHOICE" is brought into the trade, everything changes. That's why I believe this exercise is personal.
Just to further fuel this conversation, I believe a discretionary trader would have a much higher level of success with this exercise, both in win rate (%) and profits.
With coin flip you can have up to 100% success rate. It can be very very profitable.
Just change the rules make them simpler.
You flip a coin and if heads you go long otherwise short at 10 AM with one contract. You put your stop and target in advance. That's it.
Now if you ask - how can you have up to 100% success rate? You just add one more rule: Using discretion you decide if you take this trade or pass and wait for the next day.
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There are lots of threads out their regarding random entries and whether you can still make money with good money management rules. Many of them seem to illustrate that it is possible when done properly. For example I recently read an interesting thread over at Traders Place titled Random Entries on exactly this subject. The author Anthony Gardner illustrates a system with random entries that has a high success rate. He makes the comment
"For me the basic takeaway from testing random entries with exits which simply run profits and cut losses is that, in the very broadest terms, trend following works. Or at least has worked in the past on markets for which we have data. "
I think I'm accurate when I say that Anthony is a believer in longer term trend trading, and in this/his example his money management rules are designed so that he can capture those longer term trends. I'm sure there are many other viable examples as well.
I think you've missed the point of the original post, or I have.
In the exercise defined, I assume the trade entry is always taken, then "the trader" goes to work managing the trade. The option to "wait for the next day" isn't on the table here. However, dumping the trade for a quick "few tick" loss certainly is. IMO, the OP is asking, can you manage yourself OUT of a series of coin flip entries and be profitable.
Very interesting post. Thank you. It certainly would be an incredible learning experience. Even just considering it, I find challenging enough, let alone trading it.
It would be interesting to hear you expand on the personal level, and what you anticipate people might discover. I totally agree on the discretionary trader part.
Love the line, "time is the only measurable factor that doesn't retrace"!!
