The Trading Edge is a Number, and Here is the Formula
In this chapter, we will unveil one of the most well-guarded secrets in the finance industry: behind the curtain is not an old man, but a simple formula. Then, we will decompose this formula into two distinct modules: signal and money management.
Within the signal module, we will explore how to time entries and exits, and the properties of the two strategy types that seem to provide a trading edge; trend following and mean reversion. We will continue this discussion in Chapter 7, Improve Your Trading Edge, before covering the money management module in more depth in Chapter 8, Position Sizing: Money is Made in the Money Management Module.
Along the way, we will cover the following topics:
- Importing libraries
- The trading edge formula: arithmetic and geometric gain expectancy
- A trading edge is not a story
- Regardless of the asset class, there are only two strategies
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