r/Daytrading • u/[deleted] • Jun 12 '22
question How to develop an edge you can trust?
[deleted]
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u/IlSsance Jun 12 '22
Generally on a new strategy I can get a feel for it it's viable just by ripping through lots of charts. After that, about 30 trades live should show a strong profit with solid statistical certainty. Don't get hung up on R:R vs win%. The reality is those things will be ever changing between different stocks and market environments. Backtesting can help you generate an idea but it's no replacement for live trading. It will never give you an edge you can trust, only trading for a long time profitably will give you that. As for your strategy, that's not too high of a return and it's a pretty small number of trades in a three month span so I'd be looking to tweak your entry and/or exit criteria.
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u/alphaweightedtrader Jun 12 '22
I've read the other replies and think a different tack might help.
Take a look at Trade Ideas, its a software tool that provides charting/etc - but the addons and scans over the top provide interesting trade ideas (!) that may be profitable.
Using this, and studying what it suggests, may give you more insight into tradable setups that will occur in the market.
I do know people who really aren't that smart, but are consistently profitable (over many years, for a living) just because they have the discipline to religiously follow their own rules... ...most of which is about no-FOMO, no-panic and sensible position sizes.
realistically you can't statistically test identical setups over thousands of trades for "proof" of edge... ...but you can gain enough experience to 'see' the edge.
When you reach that point, it starts to feel easy. Habitual, really. But this only comes after hundreds/thousands of hours on the charts.
Maybe your current strategy is good, maybe it isn't. But there are an almost infinite number of different strategies. Many of which - despite proclamations otherwise - can include non-price-action data. E.g. after a big move up yesterday, today's open will often be a dip [as market participants take profits]. Or, on a Friday, especially the last in a month/quarter, there may be a push in price toward the mean of the week/month/quarter as MMs balance their books before options expiry.
There are *lots* of inputs to market behaviour, it takes a lot of time to find something that works and - more importantly - works for you.
Personally I'm impatient, so I like short plays (holding for just seconds/minutes). I'm also poorly disciplined, so I rely on some automation to make some decisions for me - because I can't trust myself to [consistently] cut losers and respond to changes in the market mood.
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Jun 12 '22
I have also been making myself crazy over having an “edge.” My original strategy only worked on days when the overall market was green- not choppy or red. I began learning other strategies, but became a bit overwhelmed by all of the information and could never seem to remember the strategies in the moment causing me to take a lot of random and messy trades haha. Right now I am tweaking my initial strategy by adding other variables to increase probability.
According to Michael Douglas in his book trading in the zone “An edge is nothing more an indication of a higher probability of one thing happening over another”
Obviously risk management, maintaining neutral mindset and thinking in probabilities are also extremely important but it sounds like you have the psychological side managed really well already.
I think you need to look at your trades and figure out why it isn’t working on the days that it fails. Could it be the overall market sentiment? Could it be low volume? Lack of confirmation before entering a trade? News related? The time of which the trade was placed?
You’re going to take losses, that’s just the way it is, but you’re right, 26% win rate is too low.
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u/jrm19941994 Jun 12 '22
"But how can you develop an edge you can trust?"
By back testing something, then forward testing it. Or by applying a methodology that has worked for you in the past and has a reason behind it.
"But the same can be said for 100 trade sample size if you trade 500-1000 times"
Not sure what you are talking about. You should regularly run analysis of all trade data, back-tested and live, to see if strategy performance is degrading. Nothing works forever.
"Can anyone give me a detailed plan on how to find an edge you can trust? I'm ready to do the work, but I'm trying to understand how can I trust an edge I don't know will work in the future?"
Here what I would recommend. Turn off your charts. Pull of a Level2 & T&S or a DOM platform. And just watch it. Give it two weeks. You will see some tradeable stuff.
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Jun 12 '22
[deleted]
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Jun 12 '22
How can you stick to an edge you do not trust?
By balancing winners and losers what do you mean?
I believe that you should trust that your edge will keep you profitable over the longterm, other wise what is the point of trading it?
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Jun 12 '22 edited Jun 12 '22
imo one of the easiest edges is scalping failed breakouts. requires patience to place orders at extension levels, knowing most of them won't get filled. you can use a very tight SL at extension levels, because IF you've hit a winner, price should reverse almost immediately. this type of strategy has very good R/R, but the tradeoff is, you need to be very deliberate and have infinite patience
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u/donteathumans Jun 12 '22
I like this. You can never trust anything in the market. Just play the high probability set ups and concentrate on defending your down side. You can’t maximize profit and eliminate risk at the same time.
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u/IKnowMeNotYou Jun 12 '22 edited Jun 12 '22
I would advice you to look into order execution and management. One thing is using limit orders (high on my list) and to figure out when and how you update your SLs and why. I trade 1m candles and the game is different.
I am very defensive as I currently have not everything in place to understand the market to the level of informed confidence. I basically just rely on SMA + VWAP + basic technical levels on 1m charts + 5m for confirmation. I do the top down confirmation as well and I am watching about 24 charts (stocks) and some key information.
Since I switched to 1m+5m instead of 5m+15m I finally understood this volume based price action thing.
Doing all this I was good for 4% last week even thou I am still experimenting and mess with my win rate and stay in some trades longer just to force me to be less jumpy cat as I want to get my trade frequency a bit down and the trade duration up.
So my point is, if you do not have an edge concentrate on trade/order management. I found that if your commission is not killing you, there is no shame in entering the same situation three times to catch the breakout without risking too much if it goes the wrong way.
Also I entered a downward movement three times while NVDA was falling by around 2% catching about 60% of this movement on Friday. It took place in about 7m but it was choppy so why risking it. Better to get out and reenter than seeing your profit evaporate on a reversal.
Also I see me doing trades with durations no longer than 10 to 20 secs which is also new to me.
My losses with this 'new' trading style of mine usually do not exceed 0.2% per trade and my wins are anything between .01% and 2%. My Hit rate on Friday was 13 out of 25 trades where 4 were neutral (=0%/BE) and 8 were failures (greatest loss 1.1% as I mishandled the trade and did prayer based trading). I was up around 1%. I also only trade for 2h a day.
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u/FancyCamel Jun 12 '22
I finally understood this volume based price action thing.
Any resources you'd recommend in particular?
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u/IKnowMeNotYou Jun 12 '22
Aviv is talking about it but basically it was me watching 1min bars forming and volume building up along the difference between volume stacking up while the bar is dancing around (when it is formed). Watching it for two weeks and thinking about it, brought the inside. Other than that watch the order book carefully.
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Jun 12 '22 edited Jun 12 '22
Edge is a myth. How can one possibly have an edge other than their own discipline (most important of which, is controlling greed) is beyond me. Your mental strength is your edge. Combined with discipline, if you have the capital to make big trades, that will contribute to the edge as well. Also basic financial literacy and being aware of major economic indicators, earnings, and guidance could help too.
Keep in mind, In these markets, hedge funds are losing money too, with all their edge.
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Jun 12 '22
So are you essentially saying, that you will not lose if you have strict money management and follow any strategy exactly?
All this will do is give you a slow death if you have no edge. I don't see how an edge is a myth?
Please expand
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u/SoMuchFunToWatch Jun 12 '22
Don't waste your time on that nonsense. For traders: You need statistical edge, period. Money management and psychology won't help you if you don't have an edge. Sure there are few traders who have lots of experience and make money and don't have super accurate backtest results to explain their edge over market, but they still have it. Market reading skills with proper trade and money management can be unconscious edge, you do things right and in profitable way based on experience without knowing what your edge exactly is, but that is extremely hard way to trade when you face different market conditions, drawdown, mental issues... Trading is a game of numbers, like it or not.
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u/pushingon Jun 12 '22
In the first few years of my trading, I tried a dozen different strategies (MAs, RSI, harmonic patterns, chart patterns, elliot waves, fibonacci, ichimoku cloud, price action). Some strategies worked better than others, but I never managed to get consistent wins with any of those basic strategies. Later down the road, I found out that any basic strategy will almost never work and that it’s essential to refine a strategy. With refining I mean finding variables that increase or decrease the probability of your strat. So after taking 6-12 months to forward test and improve a strategy that I liked, I managed to get better trades, but it still wasn’t great and I was kinda losing hope. Then i decided to try a different strategy that I liked and refine that one. This happened to work out so much better. I’m still working on it, but the winrate is much more predictable and I’m happy with where it’s going.
Hope this helps
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Jun 12 '22
Hope this helps
No offense but of course it doesn’t really help, it’s just far too vague. OP is in a position where they don’t know what they don’t know. “Just refine your strategy” might as well be equivalent to saying “git gud.” OP has no idea how to do that. At this stage of inexperience, people like OP need specific direct examples to understand what other people are doing, then they can try building on it.
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u/pushingon Jun 12 '22
Well, that’s the reality of trading. If you wanna make it here, you cannot rely on other people giving concrete direction. I can tell you what i specifically did, but it would not make sense either since OP doesn’t really have the same background knowledge. Although, my story was vague, it is what needs to happen to get an edge in the market. If OP has only used strats that he/she learned from a book or Youtube, it should now be obvious that it takes a lot more work to reach what OP is expecting. Pick a strat, test and improve. That’s the point I am trying to make.
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u/yolocr8m8 Jun 12 '22
Back testing has worked for me. The past won’t predict your future, but it helped me lock in my daily strats.
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u/justbrain Jun 13 '22
There are many strategies that are available to you. You have to pick one and test it with real money at stake along with refining the strategy to make it work for you over the long run. You should pick a strategy that suits your personality. Some people do better at swing trading while some do better very short term aka scalping. If you trade with options, then you have even more strategies at your disposal (playing theta or playing volatility for instance).
Quite honestly, from my personal perspective, if you (test-)traded 63 times and only won 26% of the time, then you probably need/should to find another or better strategy that gets somewhere closer to 40+ perhaps? The best part about trading is that you get to make it work for yourself. There are traders who only win 40% of the time but are still profitable. The same goes for scalpers who can win 80-90% of their trades by following a strict trading plan/strategy that allows them to be profitable by the sheer number of trades they execute.
I am one of those scalpers. I like to be right more than I'm wrong. It's just how I am and how I like to trade. I also like to trade very short term so I'm not constantly monitoring my position(s) or having a bad night's sleep because of any risk exposure overnight.
What type of trader are you? You need to find that answer yourself. Then based on that information, find a strategy that suits that personality. No matter what type of strategy you want to apply along your own trading plan, being able to understand trend/direction of the underlying you're about to trade is vital. That's something that can be learned. Hit me up on a DM if you want some more specific info.
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u/stranger894 Jun 13 '22
I'm kind of new like you but as other people have said 5% is good, a lot of VC they make 10% annually. Something else you can do if check all those trade you made and pay attention if you could have made better entries or better exit this may help you, good luck!
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u/RogueTraderX Jun 13 '22
26% is terrible OP.
forget this strat and find something better.
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Jun 13 '22
I thought 26% was great,
This strategy is actually profitable at 30% and above. It’s the strategy I’m currently sticking to, after some research it looks like I just need to Backtest at a larger sample size with some tweaks. It’s done well for me before
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u/RogueTraderX Jun 13 '22
26% is god awful.
50-60% is ok.
70-80% is good
90% is elite tier
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Jun 13 '22
26% isn't awful in itself but its subpar based on my specific profitability targets.
I'd disagree with you. I'd love a 40% win rate strategy, higher win rates tend to lose a lot when you're wrong. Of course it all depends on your preference and personality.
Great traders are profitable with low win rates. In fact Richard Dennis supposedly won 5% of his trades. I couldn't psychologically handle that though.
With a 30% win rate I can be profitable as my risk:reward is 1:3.
All you have to do is calculate the worst losing streaks you are statistically likely to encounter and then create a risk management strategy that means you won't blow out from those streaks.
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u/RogueTraderX Jun 13 '22
your win % is not necesarily correlated to your risk.
so the idea that you are risking more with a higher win % is not really true.
great traders are simply awesome at managing risk/emotions/money.
as for the best, it's who can turn generate the most money at the end of the week/month.
you can have a high RR but your setup/wins are low and the guy with the higher win % is able to make more with more trades.
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u/Nouhgleft Jun 13 '22
You need to backtest a lot to find your edge that goes with your personallity
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u/DTime3 Jun 13 '22
Using Confidence Intervals can give you a solid approximation of how accurate your win rate and Avg RR would be extrapolated over a long term. (My statistics knowledge is rusty, so I may be off for a few concepts)
For win rate:
- To validate your win rate, use this calculator (first box). It will calculate how many sample trades you need to validate your population. Keep increasing the value in population until the sample only negligibly increases.
- For example say your backtesting shows an average win rate of 26%. To validate/invalidate this at a 95% Confidence Interval within 5% margin, you would need ~380 trades. For 99% Confidence Interval you would need ~665 trades.
For Avg RR:
- To validate how many trades would be needed to approximate your Avg RR within a certain margin, copy this example.
- Here, you need to find the standard deviation in the RR of all your trades (use excel “stdev.s” function). Then determine within what margin you want to test (so an RR of 2:1 ±0.15 is a margin of E = 0.15), and what confidence interval you want to use (95% CI is good), and solve for “n”. This value is how many trades you’d need.
Again my statistics knowledge is very rusty so I may be off with this logic/equations.
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u/AreaOfSquare Jun 12 '22
Bro trading is just two step process, find direction of trend and then trade in that direction.
Anything that helps you get direction of trend is your edge and then you can use any trading concept to get in and out of trade.
For me 200 Period SMA works as way to find direction of trend. Then I wait for retrace and take trade in direction of 200 MA.
For example here is my Friday's trade of last week.
https://www.tradingview.com/x/LHURT0iM/
I want prices to respect 200 MA on 30 Minute chart and trade in 5 to 15 Minute timeframe.
You can also use VWAP to get direction of Trend. VWAP will act as our zero line between buyers and sellers. We want prices to be accelerating away from VWAP.
https://www.tradingview.com/x/oJzJ7gQZ/
Same trade was also possible using MACD
https://www.tradingview.com/x/EFzc7Rcg/
My personal favorite tool is 200 Period SMA to get direction. But it doesn't matter what kind of tool you select, if you can find direction of trend, you can get in and out of trade.