Is an edge important?

[Nelsy-Boy]

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? 

[Mercury]

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!

[trade247]

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!

 

[PandaFace]

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. 

[Mercury]

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. 

 

 

[Nelsy-Boy]

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

[phillo]