Thread by @stonXBT, @itssauravkumar recently asked me quite a concise question, on edge development.I liked [...]

@itssauravkumar recently asked me quite a concise question, on edge development.

I liked it quite a bit since it had me reflecting.

Here is a thread of my thoughts on edge/edge development.

nota bene; I am no expert on subject matter.

Edge is often a term that is used of context and can have a variety of meanings.

At the very basic premise edge, in my opinion, is the ability to allows a trader to generate alpha. https://www.investopedia.com/terms/a/alpha.asp">https://www.investopedia.com/terms/a/a...

Alpha

Alpha (α) , used in finance as a measure of performance, is the excess return of an investment relative to the return of a benchmark index.

https://www.investopedia.com/terms/a/alpha.asp

1. Edge development can be very varied. An example, it can be something as simple as noticing MSTR bidding the monthly twap back Q4 2020, to something as complex as a automated options strategy picking up mispricings in options limit order book compared to the vol surface. (1/23)

On that note, in my personal trading whether ltf scalping, intraday trading or higher time frame swings and positional trading, I want to build strategies are that are robust.

Robust is a very specific term. (2/23)

Robustness implies strategies which are transferable across timeframes (within reason) and transferable across asset classes. And don& #39;t decay to uselessness forever.
They might cycle in and out of utility over time, as market environment shifts. (3/23)

2. Going into your second point on this note, a robust edge "fades" mostly due to a shift in market environment.

Markets only exist in two states, balance or imbalance. Or trending and ranging. This tightly correlates with volatility. (4/23)

At the tail end of a range there is a compression in vol that leads to resolution of said range (a la breakout) This is when environment shifts

MMs step out. Limit orders get eaten, stops are blown. Strategies that act on provision on liquidity are bound to get chewed out (5/23)

This requires a specific set of strategy as you can imagine. Strategies that capitalise on momentum flourish here.

Gradually environment shifts, mind you its more of a gamut of colours rather than a black and white. (6/23)

So environment shifts, makers start exposing inventory again, other players step in as well. And the earlier strategies that one was utilising start "losing their edge". (7/23)

The heightened volatility starts bleeding out, and it because more favourable for a certain set of strategies (mean reverting strats) and quite unfavourable on the momentum chasers as you can well imagine. (8/23)

So if a strategies is robust, and a traders has a couple of strategies in his toolbox, that he is familiar with things work well. Long as a trader can anticipate the shift and recognise prevailing environment, they& #39;re good. (9/23)

This ability to anticipate and recognise the environment is in my (very subjective) opinion one of the best edges a trader can cultivate. (10/23)

3. Going into the third one. There is no fixed rules to adhere to specific tools for edge generation. Though in my opinion arbitrary metrics like fibs, SR levels, gann fans, elliot waves are silly. (11/23)

Since they are quite subjective, prone to cognitive biases, randomness, and do not account for the true intrinsic nature of the market.

There are multiple theories to explain the behaviour of the market, random brownian motion, autocorrelation, jump processes and so on. (12/23)

Though I believe none of these wholly explain the true nature of the market, due to its ever changing environment.

All that said, I think it& #39;s best to look historical data (quantitative analysis) coloured by the perception and positioning of the current participants. (13/23)

(Profiles, Orderflow on futs as well as options orderflow)
Options orderflow would be up there in my list since dealers move huge sums, utilise delta neutral strategies and to maintain that they often exert a significant influence on other derivatives and the underlying (14/23)

4. In context of BTC it is still a very immature and illiquid market that shifts the odds heavily in the favour of the small retail. Though if you want a much easier "edge" to exploit I& #39;d look where there are the fewest participants, the niches of DeFi, BSC and all that. (15/23)

Trading BTC intraday is still a reasonable bet, long as you cultivate a sound understanding of the market.

If you want to focus solely on scalping, BTC isn& #39;t where the action is. ES, FESX, Bund, ZN are better options. (16/23)

BTC is very illiquid market, with little to no intraday participation by the institutional players. They just want to acquire some and hold it. They are not actively trading it. So there aren& #39;t a lot of opportunities in scalping. Intraday is a different story, as I said. (17/23)

Thread on why scalping (in its literal sense) is not viable on BTC.
This might change as we start seeing more liquidity on the books, with time. (18/23) https://twitter.com/stonXBT/status/1378077386181382146?s=20">https://twitter.com/stonXBT/s...

https://twitter.com/stonXBT/status/1378077386181382146?s=20

5. That is a difficult to quantify. I usually construct a thesis for a setup. And go around to execute it. You could have a very well backtested strategy, run it on out-of-sample data, get good results and still it could bungle up in live conditions. (19/23)

You could have as a viable approach on the quant side, but I& #39;m not well versed in that aspect.
That said the sample size could depend on execution time frame, a ltf scalp setup could have like 200 or executions to have develop confidence with it. (20/23)

On the other hand I might trust a higher time frame swing strategy after 15-20 executions with good results.

Again environment/context is paramount. (21/23)

6. Since you& #39;re talking about a quantified edge here my go to learning resource is the podcast
@bettersystrader
And to name a couple books Quantitative Value by Wesley R. Gray and Option Volatility & Pricing by Sheldon Natenberg. (22/23)

7. Sound knowledge of the market. Often traders treat trading as an easy way to make a quick buck.

To get a job one has to complete the education, get a degree or two and eventually land a job after a couple gruelling inteviews. Who do we treat trading differently. (23/23)

I hope this is of value.

Ignore if word salad :)

Latest Threads Unrolled: