What is an Edge in The Market & Why it Should Not link it to Win : Loss Ratio

By Jeff Kum | 18 January 2018

This posting is regarding my explanation of what is an edge in the market and why it should not link it to win : loss ratio. Where most traders thought high win rate more than 50% or by applying good risk-reward ratio, or by simplicity, as long as you make money, you have an edge.

You may have learned something from some guru or from some article which tells you what to do and give you the formula to follow, but you don’t understand why and how he designs the method. Then you might change the plan due to 1 or 2 losing trade and come with your formula and keep adjusting until you satisfy and make some money. But in the end, you still don’t know why you make money, and you thought you have an edge in the market because you make money.
Your next question is “I can apply good Risk:Reward ratio so I still can make money in the long run, so does it mean R:R also an edge?”. My answer is right R:R is not an edge. It just helps you to minimise the chance of losing money. You should not be applying R:R if you do not know what your advantage is.
For the better understanding of this situation, please look at 2 example below (sample only):

You observed that market would trend up most of the time after Christmas day. But you do not know how many times it will happen, and you don’t see how far it will go. So you will come out with an assumption report that we call it “hypothesis”. What you should do next is backtest and record it down. Once you have sure that your hypothesis is true and high probability to be correct then you shall have more information and some conclusion which part of it will be;

Sample 1: “Stock S will go up eight times out of 10 times after the Christmas day”. By your conclusion, you already can make money by applying 1:1 win : loss ratio on this stock.

Sample 2: “Stock A will likely go up triple from the opening market price before market close at evening (if stock A open at 1 dollar, it will go up to 3 dollars before day close). It happens 3 times out of 10 times after the backtest”. From this info, you may have 3 wins, and 7 loses, but you can apply 1 risk and 3 rewards for this time and still make money.
So you may not be able to apply right R:R on case 1 due to lack of some details, but you can use it on the second sample.

My conclusion is, so both info also considers as an edge regardless of win:loss ratio.

Why New Traders Choose Not To Understand Their Trading Strategy

By Jeff Kum | 28 December 2017

Here is my thought, some seniors trader that I have met always emphasised that we need to do backtesting, to know what is the edge of our strategy. It is essential to see it, but when I read some of the posts about trading/investing in social media, most of the new trader posting their trades and a picture of their chart with fancy indicators and ask ‘what do you think?’, In my opinion, by posting your strategy on social media will not help them to pursue useful knowledge due to different traders had a different experience, different views and different approach. So my answer to them is I don’t know what it thinks and the market will not even bother what I think or what the others think of your strategy!

New traders always ask for confirmation (which I mean the group of young & new traders that already had some knowledge but still struggling), but I think they can get the confirmation info from the backtesting instead posting their one particular trade with the all-new fancy indicators. By backtesting their strategy, it will reveal whether their approach will work in the long run or not but more importantly, they will have to admit when they realised their plan is not going to make them money and by accepting the fact, they will rework on their strategy. This process will be tedious and annoying because it is a cycle, you had to do it again and again. Once you were able to find a stable and potentially profitable strategy, you will be facing more problem which I will have to explain in a lengthy essay, so you will have to rework your plan again, and the process is ongoing, it will never end.

New traders are not lazy, they are eager to learn but struggling. They choose not to understand it by themselves because they try to avoid the reality, reality that you had to disagree with yourself and to accept that you are wrong at some point and you need to change. The fact is that you will be more understanding of yourself and you are afraid of facing it. You don’t want to admit it, and you try to find someone else and hope they tell you what you want to hear.

The senior can only guide you to the path, but you had to walk thru it…..

Here are some additional point at below from pick from the book ‘Market Wizard’ as a support of my view:

1. Personal feelings and opinions are far less accurate than markets… – William O’Neil

2. Do you still talk to other traders about markets?
Not too much. Over the years, it has mostly cost me money. When I talk to other traders, I try to keep very conscious of the idea that I have to listen to myself. I try to take their information without getting overly influenced by their opinion. – Michael Marcus

3. I can always tell a rookie trader because he will ask me, “Are you short or long?” Whether I am long or short should have no bearing on his market opinion. Next, he will ask (assuming I have told him I am long), “Where are you long from?” Who cares where I am long from. That has no relevance to whether the market environment is bullish or bearish right now, or to the risk/reward balance of a long position at that moment. – Paul Tudor Jones

4.Do you use the opinions of other traders in making trading decisions, or do you operate completely solo?
I usually ignore advice from other traders, especially the ones who believe they are on to a “sure thing.” – Ed Seykota

If you want to read more content, I strongly suggest you to buy the book! You are welcome to comment below.

Investing Quotes 101

Here are some best investing quotes with a simple explanation:

  • “Don’t put all egg in one basket”

There’s a lot of good and bad company out there that you can invest so diversify your stock portfolio in order to diversify your risk.

  • “Be open-minded but investigate what is true”

You may listen to some tips given but you must do your own research as well before you start investing in that stock.

  • “Two things define your portfolio: Your patience when you are losing and your attitude when you are winning”

Most people failed because they quit learning and blame the market when they are losing, they also had a tendency to risk everything and thought nothing can be wrong when they are in winning streak.

  • “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

Nothing is guaranteed in future, so learn how to invest, make your own decision and diversify.

Target price for DRBHCOM (1619.MY)

The target price for DRBHCOM (1619.MY) is RM 2.13 and overweight rating are assigned.

This target price and rating are assigned by Analysts over the whole market and taking the mean price and mean rating.

The target price will be more reliable when a particular stock has more analysts to cover. In this case, there are 5 analysts are covering this counter.

According to the past 2 years of analysts’ performance, we can conclude that DRBHCOM share price performance used to hit the analysts’ target price.

What do you think??

This is Consensus Estimate in ShareInvestor Station.

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The target price for DRBHCOM (1619.MY) is RM 2.13 and overweight rating are assigned.This target price and rating are…

Posted by ShareInvestor Malaysia on Sunday, 19 November 2017

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