Why You NEED an Edge In Your Trading…Unless You REALLY Love Giving Away Money.

by Mark Williams on January 20, 2009

Let’s play a game.

It’s a simple game mind you, just your standard ole, heads or tails, coin flip.

But, let’s put a wager on it.

If it lands on heads, I give you $200 dollars.

If it lands on tails, I will take away $200.

How much money would you expect make after about 10 mins of play?

Who friggins knows, you’ve only been playing for ten minutes, anything can happen.

What about after 15 hours of play.

By then, we should have had enough coin flips for the results to be statistically relevant.

Well, with a simple coin flip, the odds are 50-50 (1 to 1).

And, even though you may catch a hot streak, and get 4 or 5 heads in the row, because of the mechanics and distribution of the game, you WILL be giving that money back — you will revert back to the mean.

So, the longer that you play this game, closer your bank account will be to zero.

So…how COULD you make money in this game?

What variables in this game could you change so that could make money? How could you make it so that you have a POSITIVE expectancy to make money?

Well, you could change the dollar amount that you make…

OR…

You could change the expectancy so that you get heads more often as tails.

Let’s explore changing the dollar amount.

Let’s make it so if it is heads you make $200, but if it is tails you LOSE $150.

How did that change the game?

The coin flip’s odds are still 1 to 1, so for every HEADS, there will be a TAILS, but now for every flip of the coin you make, your monetary expectancy is now 1.3 (200/150).

If I knew that for every coin flip made, I was going to make $1.30, you’d best believe I’d a coin flipping mo-fo!!!

By changing one variable in the game, you changed it from a null expectancy game to one with a postive expectancy.

And that, ladies and gentleman is what we call an EDGE — a change in the probability of an outcome in the favor of the person.

Another example.

You and your coworkers all live on the same street. You have to get to work in the morning.

@7:25AM every morning, you AND your co-workers all leave the house at the exact same time to head to work.

One day, you have calculated, because you got bored, that 25% of the time you are the first to arrive at work.

What can you do to increase your edge so that you get to work first, more often?

You could buy a faster car…

You could run all your co-workers off the road 😉 …

You could slash all of their tires every night…

Or, you could just get up earlier. If everyone is leaving at 7:25AM, what if you left at 7:20AM?

That one variable change would be enough to give you an EDGE in getting to work FIRST.

Now, will you always get to work first by leaving five minutes sooner?

No. You could get in accident. Traffic could be crappy, and you happen to get into the lane that is not moving. Fog could imped you vision long enough for your co-workers to catch up.

But, in the end you still have an EDGE, therefore, in the long run YOU WILL GET TO WORK FIRST!

And that is EDGE!

So…why do you need to have it?

The better your EDGE, the higher the expectancy that you will MAKE MONEY — in the long term. And that is what all traders want — systems that make them money.

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