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1/n We don’t talk about this much, but a huge fringe benefit of finding and defining your edge is confidence.
Reaching your first one is like groping in the dark, reading SSRN you don’t understand, and trying outdated ideas that are already priced out.
Reaching your first one is like groping in the dark, reading SSRN you don’t understand, and trying outdated ideas that are already priced out.
2/n However once you find your first one, a new world opens. Correlations become tangible, portfolio theory becomes portfolio application, and the dynamics of the market begin to make some sense.
You “cut through formalities” and understand core theses.
You “cut through formalities” and understand core theses.
3/n Personally, finding my first edge (which quickly decayed!) gave me the courage to try my other hypotheses out. Most didn’t work and I learned to fail fast, fail often.
Trading became more about exploring ideas I was curious about, than scientifically replicating papers.
Trading became more about exploring ideas I was curious about, than scientifically replicating papers.
4/n Finding edges also became much easier. I began to open myself to “nonsystematic” edges, which many quants scoffed at. (Understandable given their size.) And let me tell you, there are many pockets of air for low-capacity strategies.
5/n In any case, confidence is particularly important for retail traders and solo pros, as there is no infrastructural support nor a nigh infinite bankroll to rely on. You must assume all responsibility for developing and trading your model, regardless of how it turns out.
6/n For how cliche it sounds, trading really boils down to “buy low, sell high.” Whether something is high or low is individual and dependent on the Price of the asset and the Value you perceive it at, either now (arb) or in the future (risk)
7/n This works for every market, with more complex markets adding more moving parts on how a product’s Price is dislocated from its Value.
Luckily the market is rather efficient, so it will tell you if your Value is wrong. (Hint: Find trades that resolve quickly.)
Luckily the market is rather efficient, so it will tell you if your Value is wrong. (Hint: Find trades that resolve quickly.)
8/n Thus I would encourage any new trader to be curious, resilient, and open. In our digital age, there are more public resources than ever before; you just need to put in the work.
And don’t be afraid to ask questions!
And don’t be afraid to ask questions!
9/n Note that this doesn’t mean finding an edge ever becomes easy. Far from it. But it does get easier as fluency develops. Once you find a good one, you can refine and abuse it until it decays.
