How Do you Define Your Edge in Trading?
Updated
I feel like a lot of discussions I've had here recently are with people who know the future and/or the one true and correct way to make assessments of markets.
I'm not a big believer in knowing the future and I do not know many people with over 5 yrs trading under their belt who is.
I'd like to have a good old fashioned trading discussion, if anyone else is interested in such a thing.
How would you quantify your trading edges? In a way that does not assume you know the future, does not require you to be right all the time and does not mean you get "Rekt" if you're wrong on any one instance?
Here's one of mine. One I've used for a long time.
I like to trade retracement levels of previous swings. I do this as both bull and bear. Use it for intraday trading and longer term trading.
I'm always looking for the same trade where I long/short at the 76 retracement and I put a stop behind the 86 or last high/low.
Here's the maths on why this makes sense and how I think it gives me a reliable edge over enough trades.
When entering 3/4 of the way through a swing, I always have the same RR. I have to risk 1/4 of the swing and if I target a retest of the last high/low I have 3/4 of the swing to gain.
Which means my default min RR is 1:3. Meaning I have a breakeven win rate requirement of 34%.
That covers the first, and most critical, part. I've defined a way I can routinely attempt to make money in the market and have a fair reason to believe I won't go broke. 34% win rate is very attainable.
From here, I can start to work out my edge. To do this I need to work out my expected win rate. I find depending on the conditions I use this I can target a spike out of the high/low, improve my RR to 1:4 and I can expect to win this 40% of the time against a trend and about 60% of the time with the trend.
So let's work out the worst odds and to keep it simple we'll say I risk $1 in a position. Here's the expected value (EV) over 100 trades:
100 trades taken.
60 trades lost (60*$1 = $60).
40 trades won (40* $4 = $160)
$160 profit. Take away $60 losses and I have $100 net profit.
To obtain this, I've had to bet $1 100 times. Meaning my net spend on bets is $100 and my net return on this is 100% of what I bet.
From there, do you think I care what trades win and lose? Get sad when the 60 losses hit and think I'm Einstein of the markets on the 40 that win? Nope!
I've worked out what my expected value is. I know by the law of large numbers I have a fair expectation of getting this and the only requirement of me is to make this bet enough times (Velocity of money) for the mathematic edge to play out.
I am using fib levels which mean my RR is always the exact same. I might be trading a retracement of a 20 pips swing in EURUSD. A retracement of a 100 points swing in SPX. Retracement in a 70% drop in BTC. Doesn't matter. The amount of distance to my stop loss and distance to my target is always the same. It's ratio based. Symmetrical RR.
The only thing left for me to do is make sure I have a uniform bet size by trading larger positions in less volatile assets and trading smaller ones in more volatile assets so all moves against me "Cost" the same.
This is one of my bread and butter strategies. If you've followed me day trading you'll have seen me execute on this literally 100s of times. You'll have seen times it went absolutely perfectly and times it looked utterly stupid because I faded mega momentum and it ran through - but to me, they're all just the same trade.
These are discussions on trading I am more interested in. I'm don't care much for, "My analysis is bigger than your analysis" kinda stuff.
I like to talk about how we can accept we do not know the future but have strategies that give us a good expectation of being profitable whatever it may be.
I'm not a big believer in knowing the future and I do not know many people with over 5 yrs trading under their belt who is.
I'd like to have a good old fashioned trading discussion, if anyone else is interested in such a thing.
How would you quantify your trading edges? In a way that does not assume you know the future, does not require you to be right all the time and does not mean you get "Rekt" if you're wrong on any one instance?
Here's one of mine. One I've used for a long time.
I like to trade retracement levels of previous swings. I do this as both bull and bear. Use it for intraday trading and longer term trading.
I'm always looking for the same trade where I long/short at the 76 retracement and I put a stop behind the 86 or last high/low.
Here's the maths on why this makes sense and how I think it gives me a reliable edge over enough trades.
When entering 3/4 of the way through a swing, I always have the same RR. I have to risk 1/4 of the swing and if I target a retest of the last high/low I have 3/4 of the swing to gain.
Which means my default min RR is 1:3. Meaning I have a breakeven win rate requirement of 34%.
That covers the first, and most critical, part. I've defined a way I can routinely attempt to make money in the market and have a fair reason to believe I won't go broke. 34% win rate is very attainable.
From here, I can start to work out my edge. To do this I need to work out my expected win rate. I find depending on the conditions I use this I can target a spike out of the high/low, improve my RR to 1:4 and I can expect to win this 40% of the time against a trend and about 60% of the time with the trend.
So let's work out the worst odds and to keep it simple we'll say I risk $1 in a position. Here's the expected value (EV) over 100 trades:
100 trades taken.
60 trades lost (60*$1 = $60).
40 trades won (40* $4 = $160)
$160 profit. Take away $60 losses and I have $100 net profit.
To obtain this, I've had to bet $1 100 times. Meaning my net spend on bets is $100 and my net return on this is 100% of what I bet.
From there, do you think I care what trades win and lose? Get sad when the 60 losses hit and think I'm Einstein of the markets on the 40 that win? Nope!
I've worked out what my expected value is. I know by the law of large numbers I have a fair expectation of getting this and the only requirement of me is to make this bet enough times (Velocity of money) for the mathematic edge to play out.
I am using fib levels which mean my RR is always the exact same. I might be trading a retracement of a 20 pips swing in EURUSD. A retracement of a 100 points swing in SPX. Retracement in a 70% drop in BTC. Doesn't matter. The amount of distance to my stop loss and distance to my target is always the same. It's ratio based. Symmetrical RR.
The only thing left for me to do is make sure I have a uniform bet size by trading larger positions in less volatile assets and trading smaller ones in more volatile assets so all moves against me "Cost" the same.
This is one of my bread and butter strategies. If you've followed me day trading you'll have seen me execute on this literally 100s of times. You'll have seen times it went absolutely perfectly and times it looked utterly stupid because I faded mega momentum and it ran through - but to me, they're all just the same trade.
These are discussions on trading I am more interested in. I'm don't care much for, "My analysis is bigger than your analysis" kinda stuff.
I like to talk about how we can accept we do not know the future but have strategies that give us a good expectation of being profitable whatever it may be.
Note
Sadly, the comments are mostly one guy who thinks they know the future and does everything they can to avoid framing their ideas in a testable strategy. Sad times in the market.
Name of the website should be changed to ClairvoyantView.
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