What is an Edge?

What is an Edge?

Do Casinos make money? Of course they do; the odds of each game are predetermined and are set so that the house always has an edge. The house does not win every roll, spin, or deal, but the house will ultimately win over the log term, i.e. over hundreds of rolls, spins etc. The odds are stacked against the player and there is no way to get around them.

In the stock markets, the odds are also stacked against the player but there are ways to get around them. This is why you need an edge and a reliable system. If you trade without an edge, you will ultimately lose money.

An edge is nothing other than the ability of a trader to have long term results which are statistically above what could have been expected from random chance. A trader has an edge whenever there is a long term tendency to gain a profit which could have not been achieved through simple luck with meaningful probability. An edge is a long term quality which is only present when a trader can demonstrate the ability to profit above what could be expected from chance.

When a trader realises that an edge is nothing but a statistical property that describes if they can or cannot perform above a random chance strategy, it becomes evident that it can only be demonstrated through long-term performance (as short term results have a much higher probability to be the consequence of chance). This means that any trader who is interested in achieving an edge must make the commitment to focus on long-term profits.

Like the casino, having an edge does not mean that every trade you take is profitable. Having an edge also does not mean that you will never lose money in the short term. All trading systems with a positive edge will have drawdowns. The secret is to know the maximum expected drawdown with the edge used.

Examples of simple trading edges are shown here.

How do you get an Edge?

We know that an edge is a statistical property derived from long-term trading which simply implies that a trader can perform better than chance, it becomes clear that in order to get an edge we must focus on gaining an ability to beat a random long term strategy. Therefore the efforts of any trader who wants an edge, either discretionary or algorithmic, should be to find a way to achieve long term results that beat a random strategy without any focus on profit targets except to make these targets larger than those attainable by chance. When you focus on gaining an edge as a journey to gain a statistical long-term advantage over the market things get a lot clearer as you now know that you need to perform long-term evaluations of either your discretionary skills or algorithmic systems so that you can gain an advantage.

Trading profitably does not come from any miraculous development but it comes from judicious evaluation, an in-depth focus on statistics and a focus on long-term results and the evaluation of systems through their long-term targets and expected statistical characteristics. Trading is therefore like any other working area where you need to work hard to find things that achieve the results you want. Remember that if you want an edge, the ability to beat a random performer in the long term, you will need to build up your knowledge about statistics and work fully towards this simple but difficult to achieve purpose.

One way of getting an edge is to develop a system by testing and validating ideas. The goal is to observe what has worked in the past and build a trading strategy or system around these observations. This is algorithmic trading.

This approach can take a long time especially if you are a novice. Luckily, there is another better way. SET Investments use a fully defined and tested trading systems using quantifiable edges in the markets. SET Investments is not a get rich quick scheme, but is a reliable system which has been proven to work over many years in many market conditions.