Basic Points

• An edge in trading is a competitive advantage, and it can be any method, idea, or tool which helps to outperform randomness. 
• But in no way is an edge a guarantee of profits. 
• If truly an edge, then it should come out on top the greater the number of occurrences, provided that size is not so large as to risk blowing up the account. Such risks should never be taken with savings or money that one cannot lose. A small enough size keeps you in the game, where you can let the edge play out.
• A good trade has edge because it should do well over thousands of occurrences.
• No single trade is proof or disproof of having edge. A losing trade can be a good trade and a winning trade can be a bad trade (luck without proper edge).
• The bottom line is that if you have edge in your trading then you have a positive expected value, where you should come out on top if your size is small enough and you are able to execute a large number of attempts. 
• Execution is also more and more important these days as inefficiencies get smaller. The old masters did not need to focus on execution as much as modern traders do today. Having edge can get undermined by sloppy execution and bring about negative expectancy. 

Advanced Discussion and Examples

There are centuries-old criticisms that the market is efficient and no real edges exist. These notions are based on how all market participants have access to the same information. However, they do not. Some have access to higher-quality information (HIRO for example) and then some are more experienced at narrowing down the most important information, and also are more skilled at using that information, like how chess players all know the same rules but the same champions usually prevail. This point was raised by Jack Schwager in the opener to his first Market Wizards book, in which he interviews traders bringing in extraordinary returns over the years. 

And as Euan Sinclair puts it, “Traders operate in a realm of ignorance and unknowability where probabilities are changing, poorly defined, and the events they measure change. We will never know more than a tiny fraction of what can be known. And what can be known is a tiny fraction of all that there is” (2020, p. 181). The fact that we can only know a tiny fraction of what is knowable, and that this itself is only a tiny fraction of what is unknowable, is a reason to look very hard and test ideas as rigorously as possible. Edges exist. Below are some of the main types:

• Support/Resistance of key levels from well-tested systems
• Positional (waiting for the right market moves before entering)
• Depth of Market (examining liquidity for confluence with key levels)
• Volatility risk premium (persistent edge associated with selling premium)
• Ergodicity (knowing how to survive and stay in the game)
• Momentum vs mean reversion strategies (trading or fading trends)
• The use of signals (timely market responses from a strong system)
• Ladders (spreading out strikes and bids across multiple levels for layered accumulation)
• Trade execution and management (informed sizing, profit taking, and exit plans)
• Directional clues
• Observing imbalances
• Tape reading (mastering time and sales)
• Iceberg flows (studying what institutions are hiding from time and sales)
• Leg risk (entering and exiting trades in pieces, logically and safely)
• Fantasy bids (attempting bids far out of market in case of an extreme event)
• Skew (buying a lower IV% and writing a higher IV% vertically)
• Term structure (buying a lower IV% and writing a higher IV% horizontally)