Edge

Trader's Glossary · Process and risk

Definition. A method's statistically documented ability to produce a positive result after costs over the long run, i.e. a positive expectancy.

How it works

A setup describes a market situation; an edge is proof that trading that situation by fixed rules makes more on average than it costs. The proof is statistics from a large sample of trades: expectancy in R, the largest drawdown, the longest losing streak, and results outside the sample the rules were built on.

Example

A hypothetical system wins 45% of the time, makes 1.5R on average and loses 1R. Its expectancy is +0.125R per trade, even though it loses more often than it wins. In a simulation, after 20 trades one run in four is still negative, and after 500 only about 1%.

What to watch out for

A few successful examples on a historical chart are not an edge. An edge can also disappear when the market changes or once you account for commissions and slippage.

See also

Expectancy, Win rate, Sample size, Backtest.

More in Hetman Capital Club

Full article in the Club (in Polish): 🧪 Edge: when a setup stops being a story from a chart.

You'll find the full explanation with graphics, examples and exercises in the 🖥️ Order flow atlas space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).

Educational content, not investment advice.