Types of Edges part 2

Please read part 1 first!

Now some examples:

Hard Edges:

• ⁠HFTs have a hard edge because they take advantage of micro structures and inefficiencies. Some have monopolies. • ⁠In one of her books, Linda Raschke describes a situation where she noticed that futures would jump at a consistent time of the day. After doing some research, she found out that some large bank would send large size buy orders. She immediately started front-running this! After some time, the bank got smarter and started scattering their orders. Poof, edge is gone! • ⁠During Covid, it was noticed that stocks would jump up at let’s say 9am pre-market. Why? You can start trading pre-market as early as 7(even earlier), but Robinhood only allowed their traders to start trading at 9. So people would buy at 8.59 and ride the pop. This eventually went away, I believe even before Robinhood extended pre-market session to start earlier. (Don’t quote me on timing, just an example)

Statistical edges:

⁠Gold/Silver ratio • ⁠Pairs trading • ⁠Market Making • ⁠Arbitrage trading All above strategies may be statistically proven to have edges. However, it does not mean you can trade them profitably. People can and do, but they degrade or have prolonged draw downs. Could be overcrowded, market rule changes, prolonged bull or bear markets, etc. Removes emotions on execution, but doesn’t remove emotions when strategy keeps going into drawdowns.

Soft edges examples: You all know what they are - technical analysis, market profile, etc. There’s no inherent edge in these set ups! You may and likely will disagree, but this is precisely why most retail traders fail even if they follow a profitable trader. Because his/her edge is NOT from the pattern, but from the execution. Nothing wrong with that as long as you understand that just because two lines cross on your chart doesn’t mean you are guaranteed to make money. I am myself in this group, so not knocking it in any way!

Hope it is useful :) Best, Trade Support