Identifying your edge in the markets.

What is an edge? In trading and investing, your edge is the strategy you employ to beat the market and be profitable. There are many "edges" in the world of investing and trading and every trader or investor from the garage to wall street believes that they have one and is the reason that (for now) they are still in the game.

Sure enough, time frames are a huge factor when determining your edge in the market. Those who participated in the bubble of 2017 needed no edge to make fantastic returns, at least on paper. But the true test of whether you have an edge in the market is performance over a longer period of time, and repeatable results.

Again, let me stress that for you. Performance over a long period of time and Repeatable results.

Everybody thought they were the next Warren Buffet in 2017 and pretty much buying any ICO, or alt-coin, or heck, just Bitcoin would have landed them a serious ego to back that up. But the true test of an edge is whether they can maintain a positive PNL over a long period of time. It's no good gaining 1000% in a year, only to lose it the following year and similarly, it's no good being able to make fantastic gains in one scenario, but failing to make gains in all the others.

What kind of edges are there?

For the purpose of discussion in this short article, I will discuss just a few edges but there are obviously many more. Anybody that can prove repeatable results, and performance over a long period of time - both together and not just one, can claim to have an edge.

These are the ones that bring some of the best results :

Back-tested trading setups based on technical analysis. In simple terms, technical analysis is an umbrella term that refers to all manners of analysing price action and inferring ideal risk reward setups to execute trades. Those that have an edge in this market are able to identify patterns which can then become setups for potentially profitable trades. If their edge is good, then they will have a statistical edge and higher probability over time for making a positive return.

Traders who understand their edge are humble. They will not claim to make 100% winning trades because that is statistically anomalous. Rather, they understand that probabilities are inherent in every edge and that just by repeating the same setups over and over again - much like an algorithm - they are able to beat the market over a long period of time.

With so many indicators and patterns, it is very easy to get lost into the appeal of certain strategies and not recognise that along with a statistical edge, there is fundamental risk management which applies all of the time. There are many people who can identify high probability setups, but don't know how to cut their losses when the time calls for it. Other times, a trader will recognise a setup but fail to action it.

A rounded knowledge of statistical edges combined with good risk management and emotional self control will lend itself very well to traders. Especially swing traders, day traders, and scalpers.

Fundamental edge

Chain Metrics.

Now, it's hard to really define what exactly is a fundamental edge, but in terms of crypto, this usually boils down to understanding on-chain metrics like transaction velocity, network momentum, hash rate, and how this ties together with the behaviour of the market as a whole. People who use fundamental edges will not action their "trades" or investments in short term positions. This is because they understand that their edge is baked in over a longer period of time.

Insider Information.

Information available to the masses is rarely a valuable piece of information. Rather, it is information known by the few that has an edge. By now, you should realise that the masses are the source of liquidity and potential profit for the large interests and therefore, it is in your best interest to think like the few, and be contrarian when an emotional state feels very crowded by the market. By the same token, most of us do not have access to real insider information because actionable information which can lead to significant gains will never be publicly revealed. It is down to you to try and obtain this information and most of the time, you simply won't get it. Sadly, this is not an edge that can simply be learned or easily gained. It is however one of the edges available to the few.

Deep Pockets.

This category of edge usually applies to market makers or investors with sufficiently deep pockets to carry a negative positional delta for the time period necessary till they see a return. Obviously, having deep pockets has a number of advantages. In daytrading, you're able to build sizeable positions without using much (or any) leverage. It also means you can build a position over a very long period of time if your conviction remains strong about the macro trend. Do you think Goldman sachs goes into a market with leverage? Furthermore, do you think they have a "stop loss"? The answer is no.

Those with deep pockets will include HNWI's, Hedge Funds, and other Institutional players. They will typically use their large pool of liquidity to "run" the markets. That is, instead of waiting for a market to bottom, they set the bottom. It's nice being rich huh...

But you don't have to be a billionaire to reap the benefits of having deep pockets as an edge. One thing that those with large invest-able capital have available to them is large time horizons. You are able to hold for long periods of time, whether that's through a negative yielding position, or one that is ballooning into bubble territory.

One of the most difficult aspects of being a successful investor or trader which precludes the majority of momma pop shop retail participants is their short run need for the money invested. If you simply don't "need" that money, you are simply not exposed to the emotional volatility of the market ebb and flows.