What Does it Mean to Have an “Edge” in Trading? Defining an Important Concept

The ability to make money in the markets is what all people want when they get into trading. When you ask successful manual or algorithmic traders what is needed the answer you get from them is usually that you need an “edge” in order to gain this ability and make money in the long term within the market. But what does it mean to have an edge ? The answer to this question is not trivial and many people actually get very confused about what it truly means to have an edge and especially how such an edge is to be found. Certainly the issue of what constitutes an edge and how a trader can evolve from not having one to building one is of paramount importance as the gaining of an “edge” is the most fundamental aspect of profitable long term trading. So what is an edge?

New traders usually associate the “edge property” with what seems to be a very “mystical” character. Usually a person new to trading will think that an edge is some sort of epiphany in which a trader suddenly gains the ability to profit. Many aspiring traders describe this as “getting it”, the ability to be able to gain some insight into trading which comes after some sort of revelatory experience. In the case of algorithmic trading, new traders think something similar, that an edge comes from some extremely expensive and advanced piece of software, the “magic bullet” which is able to generate money like an ATM. These misconceptions about what an edge is usually generate a lot of trouble for traders since there is no clear route to achieve the above mentioned and almost mythological goals.

To be clear, an edge is nothing else 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. For example a trader that makes a 20% return per year for 5 years with 50 trades per year has an edge as the probability to achieve this exact same result simply by doing random entries/exits is very close to zero (of course, it will never be zero). Therefore an edge has NOTHING to do with huge returns in short amounts of time, it has nothing to do with a person who makes a 200% return in a two month period. 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 we realize that an edge is nothing but a statistical property that describes if a trader 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 innate probability to be the consequence of chance). This means that any trader who is interested in achieving an edge to be able to profit must make a commitment and focus on LONG TERM profit targets. Whenever traders focus on the short term there is an inherent focus on immediate results (which are largely random) and therefore many traders end up wiping accounts as they do not focus on getting an edge but on generating very high short term profits which are just the results of short term luck and are soon after wiped out.

How do you get an edge? Well now that 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 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.

There is no “getting it”, no “magic bullet” and no ephinphany or revelation you will one day have in front of your screen. Trading profitably does not come from any miraculous development but it comes from judicious evaluation, an in-depth focus on statistics and – quite importantly – a focus on long term results and the evaluation of systems through their LONG TERM targets and expected statistical characteristics. Therefore trading is – not surprisingly – 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.

If you would like to learn more about my work in algorithmic trading and how you too can gain a true education in this field please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)

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One Response to “What Does it Mean to Have an “Edge” in Trading? Defining an Important Concept”

  1. Dan says:

    Great Picture!!!

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