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The question of an edge


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The question of an edge

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  #11 (permalink)
no drama Llama
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TheShrike View Post
Those things you listed are prerequisite to success and may help you adjust yourself to attaining an edge. By themselves they do not equal one.

Thats what I am saying, the sum total of those things=your edge so how do you describe it or encapsulate it all into a single mathematical statistic?

As far as I am concerned, a positive expectancy sounds just like the gamblers fallacy where you flip 3 heads in a row and you then have this expectation that the 4th will be the same. Expectancy only represents what you have done to date and has no bearing on future results. The same with your actual strategy, what you rely on today could be quite different in a years time. The only constants that you can safely rely on are the things in that list (and a few other things).

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  #12 (permalink)
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Grantx View Post
Thats what I am saying, the sum total of those things=your edge so how do you describe it or encapsulate it all into a single mathematical statistic?

As far as I am concerned, a positive expectancy sounds just like the gamblers fallacy where you flip 3 heads in a row and you then have this expectation that the 4th will be the same. Expectancy only represents what you have done to date and has no bearing on future results. The same with your actual strategy, what you rely on today could be quite different in a years time. The only constants that you can safely rely on are the things in that list (and a few other things).

If you think "positive expectancy" is the same as gambler's fallacy, I am confident you do not understand expectancy and how it can be of benefit.

Based on 25+ years of doing this, I can tell you I put a whole lot more faith in being successful by trading positive expectancy strategies than by journaling my thoughts...

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  #13 (permalink)
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kevinkdog View Post
I am confident you do not understand expectancy and how it can be of benefit.
.

You are absolutely right. I dont understand.

And I am glad that I asked the original question because I have traders such as yourself with 25+ years of experience giving a lesson that didn't take me years to figure out the hard way

Thank you. Ill be focusing on my mathematical +expectancy going forward.

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  #14 (permalink)
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With the benefit of Two Pints of Old Peculier I am actually 100% sure that the positive mathematical expectancy for a strategy lasts no longer than the market conditions in which that strategy performs successfully do.

A good friend who used to work for me became CTO of a large risk metrics outfit employing c50 Phd's. He confessed that the biggest problem he had was that they actually believed in what they did. Sometimes reality needs common sense to see past the numbers, as well as debunk the beliefs.

Cheers

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  #15 (permalink)
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Interesting conversation, thanks for starting it @Grantx.

I agree with @kevinkdog’s statement that expectancy is edge and @TheShrike's comment that the things listed in the OP are prerequisites and not "edge" but I understand the difficulty in quantifying it for a discretionary trader. It’s not as simple as saying that ‘I go long when the 20 EMA crosses above the 50 EMA and this has a hit rate of X% and positive expectancy of 0.X% over a series of 1,000 trades.’

Part of the problem for someone who identifies as a discretionary trader is to distill their “edge” into a single sentence or statement. I personally feel that if someone has proven to be consistently profitable (with a positive expectancy) over a large sample size of both trades and time then their discretion itself is their edge. This large sample size is essential because it has to entail numerous distinct market conditions as @ratfink alluded to. Good luck trying to summarize this into a single sentence or paragraph though.

I’ve seen many times the question be posed to someone on the site “what is your edge?” I feel it’s a catch 22 just like when someone applies for their first job. It’s tough to get a job without experience but you need a job to get experience. The same applies to a discretionary edge. You can’t be consistently profitable without an edge but you can’t prove edge without being consistently profitable.

I think if you posed the same question to a consistently profitable discretionary trader either past or present on this site to distill their “edge” into a single sentence, keeping it PG, they might quote Boris Johnson and tell you to “go whistle.”

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  #16 (permalink)
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Grantx View Post
Dude: I want to try this new strategy on this instrument what do ya-all think?
Trader: Whats your statistical back tested edge?
Dude: .............


How do you reduce something so complex down to a single question like that and expect an answer? Most times it can take an entire journal and we still wont know what a traders edge is.

Well, asking a trader to define his edge is like asking a magician to show you how he sawed the lady in the half. They're probably asking, "Do you HAVE an edge?"

A better question might be: are there any successful futures traders who didn't understand their own edge? They made profitable trades but it was all just a mystical feeling when they bought and sold (?).

I think when someone asks if you have an edge, they're really asking, "Do you have any idea of what you're doing? Do you have a real trading strategy or are you just whimsically trading based on this week's newest indicator?"

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  #17 (permalink)
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... having
• a positive expectancy,
• a working system
• programmed or not
• back tested or not
• 55% plus gains or not
• hundreds of hours screen time

BUT you face
• a new market field today (other than the past) AND
• you need to throw REAL money (yours or others) into the market...
• you need to PUSH the BUTTON (system or real time)
• your observance might overrule your strategy
• you might be pushing your stops further away
etc.
you know the whole story.

So having an edge is fine - but there is no proof either.
For the survival in the Future.

Good development!
GFIs1

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  #18 (permalink)
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ratfink View Post
.....the positive mathematical expectancy for a strategy lasts no longer than the market conditions in which that strategy performs successfully do.

A good friend who used to work for me became CTO of a large risk metrics outfit employing c50 Phd's. He confessed that the biggest problem he had was that they actually believed in what they did. Sometimes reality needs common sense to see past the numbers, as well as debunk the beliefs.

Thanks, I have just finished a book and you have reminded me about 'When Genius Failed' by Roger Lowenstein (the demise of the LTCM hedge fund), one of my favourites. I will re-read that.

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  #19 (permalink)
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i think i can call myself a full discretionary trader, which means the only tools i use for my trading is the Depth&Sales in futures trading and MarketMakerBox and Time&Sales in stocks trading. i watch the play between buyers and sellers and make my final decision on which side has control. Eg in a range we see buyer aggresiveness from support to resistance. then the price comes back to support bc buyers are loading up and dont want a breakout at this moment and sellers are not quite aggressive, price chopps back to support. finally buyers become more aggressive and breakout of the range. how do you want to backtest this? you can only gain this knowledge by watching the time&sales for monthes. how do you want to backtest fake orders on the order book. offer is pumping up and the same guy loading on the other side. no way to backtest it. you see it you join the party. if it goes in my favor i make 5 times more than it goes against me. there is no way you can backtest these things. i use highlowclose bar charts only to identify interesting price levels and thats it. and. to identify the market structure.


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  #20 (permalink)
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Some things are difficult to backtest, but not impossible. For instance you can record the level 2 data, and write a bot that trades it. If you can't program you can just trade against an old days worth of data. That's why I have a journal where I post a video of my jigsaw DOM. So I can go back, review old data.

You can also forward test. It's ok to say there is a human element to your trades. However, without categorizing your trades by signal, and tracking the win/loss percentage, average win, and average loss, there is no way to know what your expectancy is. A signal could mean the opposite of what you thing, but because you don't track it you might never notice. Hence why it is critical to journal your trades.

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