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What's an Edge?
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What's an Edge?

I often quote Van Tharp while talking to clients and traders. He says “If you don’t have rules to trade, everything you do is a mistake.” I would like to further add to above quote “If you have rules to trade without an “Edge”, everything you do is a mistake”.

So, what’s the edge? The edge here means a quantitative advantage which can be measured to have been profitable over many trades & years, under various market conditions. It’s simply what the average % return/per trade that you can expect to gain over many number of trades. For example we did 5 trades as per below details in a month & result is something like this;

Trade

Return%

1

6.17 %

2

5.39%

3

-2.5%

4

4.5%

5

-1.6 %

Avg Profit

2.39%

 

 

The avg profit in the above table is our edge or mathematical advantage. For any business to prosper, it has to have some kind of advantage over competition to be successful. For example, some may have pricing advantage, some may have unique product differentiation and some may have advantage over distribution or manufacturing. Similarly, trading is no different. If you want to be a profitable trader or investor, you have to have some kind of edge or mathematical advantage as shown above, which you can exploit consistently. Let’s take an example of Warren Buffet. What’s Buffet’s edge? Well, you don’t compound large capital over 20 % per year for over 50 years if you don’t have some kind of serious edge. In fact he invests primarily into the businesses which have “moat” around them. Moat here simply is a competitive advantage or edge of the company over competition.  

Most people lose money in the markets because they don’t have proper rule sets to approach the markets on daily basis. They will mostly rely on CNBC & their talking heads, Newspapers, brokers, relatives, friends & get lured by get rich quick schemes. Having rules also is not sufficient if those rules are not properly backtested to have an “Edge” or “Mathematical Advantage”. The only way to win in the markets on a consistent basis is to have trading systems with a proven edge & executing it over & over again over a long periods of time.

Just think for a moment. How are you supposed to compete with the likes of professional traders, FIIs, DIIs, Mutual funds and HNIs who have access to fast and accurate information & data and who have billions of dollars at their disposal without some kind of an edge? Your chances are very slim & that’s the reason so many people lose money in the markets.

 

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DISCLAIMER:

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEYARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

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