Once you are on the road to trading, there will be a time, when you will need to ask your self this question “What’s Your Edge?” Infact you even need to ask this question to anyone whose services you have subscribed to or would want to subscribe in the near future or when buying a trading system.
So what’s the Edge? Edge or as some say Expectancy is mathematically calculated using the following formula;
E= (PW*AW) – (PL*AL )
Where:
E= Expectation or THE EDGE
PW= Winning Percent
Aw= Average Winner
PL= Losing Percent
To make it more lucid, let us assume that you have a trading system which has 50 percent winning trades and average winning trade is for Rs 500 and the average losing trade is for Rs 350. Then using the above formula we can calculate your Edge;
E= (PW*AW) – (PL*AL )
Edge= (.50*500) – (.50*350),
Edge= 250-175,
Edge= Rs 75 on an average per gain per trade.
This means over a time you would expect to earn Rs 75 for each trade placed. Now assuming that you are approached by an analyst or a system vendor, who offers you his services for a fee, but has a system, which has only 40 percent winners, with an average win of 900 bucks and an average loser of 350 bucks. What would be his Edge be? Again using the above formula we get;
Edge= (.40*900) – (.60*350),
Edge= 360 – 210,
Edge= Rs 150 on an average per gain per trade.
So it seems your so called analyst has almost 2 times the Edge and you would be better off trading with him or at least would agree that his system is better placed even though his winning percent is much lower!
Therefore next time you see someone screaming that they give “90 percent or for that matter 99 percent winning trades” don’t get excited, but very quietly ask the gentleman “So What’s Your Edge?”
Edge, moat in whatever way you describe it. Coca-Cola apple have brand edge same way in trading finding an edge is very important. Technically you may be very sound or you keep greed under control to take a deep in the money spread and thus buy a share cheaper than mkt price and at a fraction of cost, (though in India may not be possible because of derivative regulations).All these are edges including an edge in understanding annual reports and balance sheets. It is your time mind and business invest wisely.
ReplyDeletehttp://www.moneyshow.com/video/video.asp?wid=4079&t=3&scode=014800
ReplyDeleteHere is the video link of one blog which Manoj follows telling what sorts of edges you need in the mkt.
To recapitulate the above video.Let me share what I have preserved for my reference,he talks about.about multiple edges viz.
ReplyDeleteaccuracy edge more accurate trades
monetary edge how much u can ride profit if it works vis-a-vis how fast you cut losses if it does not.
buying at pull back into the support in the direction of prevailing trend say from maverages.Bull Flag.And so if mkt does not go lower and goes back in the direction of trend.And knowing resistance level.