Putting Losses in Perspective - Do you have an Edge?

One of the fundamental reasons for losses in trading can be traced to lack of an “Edge”. But then you would ask me what is an Edge?

To me a trading edge is -

An ability to isolate a condition or a set of conditions among a market variable or a set of market variables - that has a non random way to evolve over a specific period of time.

I remember reading somewhere, but I cannot place it where - it said - “If you can’t explain your trading edge, you don’t have one” - Let me take it to the next level

If you do not know the statistical a) probability of the set of (prerequisite) condition/s that need to occur b) the probability distribution of the outcomes once the conditions (a) occur.

If you cannot articulate both then in my world you do not have an edge.

It’s quite possible that you are a veteran and even though you cannot articulate your edge, you have internalized it over a long period of time. But that according to me is a long winded route and I would personally prefer to be in the know of my edge.

So coming back to losses, the reason we need to be able to articulate our edge is - in the event of a loss, we need to know if its a part of our larger probabilistic framework or is it something which is beyond that. We need some objective reference. For example if you have a loss streak of 5 days, you need to know its statistically “normal” in your trading system or is it an anomaly.

In other words, your understanding of the variables of your edge helps you put your trading outcomes in a measurable context.

In the same breadth, it also helps us understand if the market regime itself is changing, and helps us adapt better.

So the next time you make a loss you know who to catch first?

Finding 'edge' through Data Curation

When we talk of ‘edge’ in trading it essentially means, what is it different that you or your system has which would lead to an ‘alpha’ in terms of returns. One way to extend that question is to ask ourselves, as to what are the sources of that edge?

To me having a more deeper and nuanced understanding of the contexts and setups that I trade, exponentially adds to my edge. To get a better sense of my contexts, one of the practices that has massively helped me in my trading, is curating setup specific data. This is a lot of work, let me tell you. Sometimes it’s very difficult to train the computer to do what we humans can do intuitively, which means a lot of it is manual labor.

Let me try to give you a sense of what I mean, if you follow my blog you would know that, these are the three setups that I trade.

NIFTY - Scalping Set-up - 01 - Opening Spikes & Opening Drive

NIFTY - Scalping Set-up - 02 - Mid-Day Mean Reversion

NIFTY - Scalping Set-up - 03 - Afternoon Range Extension

Now each of these setups have their nuances and details, like

a) At what time did the entry get signaled? Is that time range bound? Is there a seasonal skew to it?

b) Range breakouts on VIX? Time and Amplitude.

c) What is the average size of the pullbacks that in the setups you trade?

d) What is the ideal holding time for your some of your setups, based on the length of the trends?

A lot of these computations are possible only if you have specific data. Therefore, this is a practice that we follow in-house and for our clients - i.e. to capture such data so as to run tests on it.

Here is a mini snapshot of the data. (Disclaimer : The snapshot may make no sense whatsoever without context)

View fullsize

This practice when followed over long periods of time can give you a gold mine of data, which (I believe) can add to your trading expectancy.

NiftyScalper | StatShot - 03 | High Low Markers

One of the reference points for Mean Reversion and Range Extension trades is the High and Low reference of the day w.r.t time. Here is a set of stats which helps us take a probabilistic view of the day structure. 

The hypothesis that we tried to test here was - How often does the High or Low marked x minutes after the market open remains so for the rest of the day?

Y axis in % | X axis in Minutes - Data - 847 Trading days till Nov'17

NiftyScalper | StatShot - 02 | Volatility Clusters

StatShot 01 - Here

In this post let's look at the time segments within the day when NIFTY is more volatile. If you ask what is the relevance of this? Then perhaps you would need to dig a bit on the Internet to understand the relevance of volatility in the context of day trading, but for those in the know, here are the time segments which offer you the "meat" of the day. 

The idea is, your return on time invested would increase exponentially if you avoid trading in time segments that are not volatile. 

A through F stand for an hour of trading time and G for 15 mins. 9:15 to 15:30

The light blue colour represents moves of 3 points / min; light pink represents 5 points / min; and dark blue represents 10 points / min. 

If you are wondering as to why segment "D" has the maximum number of 10 point moves well, here is some hint.

 All standard disclaimers apply, trade safe!

NiftyScalper | StatShot - 01 | High/Low Time Segment

Starting a new series here on the blog called "StatShot". The idea is to bring to you statistics based snapshots of NIFTY. Be warned that you cannot use these in isolation for your trading, it has to be used in a specific context while creating your strategy or setups.

Coming to our first 'StatShot' in the series. Let's took at what I call the 'High/Low Time Segment'. As an Intraday trader one of the key things is to determine your supports or resistances, and to do that you need to know when (at what time i.e.) does an index mark its high or low during the day. Of course you could slice and dice the data to get to more nuanced stats and probabilities.

So heres's how it looks like for NIFTY

Based on NIFTY Data (2014 to 2017) - A through F constitute 1 hour each and G is 15 min

With this info. you can take a probabilistic call as to where your supports and resistances lie.

Hope this helps.

Trade Safe.