This term, "edge" is tossed around in the trading community more than almost any other, yet there seems to be no consistent use case or definition for it. People say mental edge, execution edge, etc. Here I am going to take a shot at applying a more objective use of the word as well as explain where some use cases go wrong.
For the sake of this post edge will be defined as:
Edge: An objective methodology, that when executed over a large sample size, provides a positive expectancy.
And for the sake of clarification:
Objective: Remains the same regardless of human intervention.
There are so many ways to skin a cat in this game and so it is impossible to say that any one tool is better than another or has more edge than another. A tool is simply a tool. Just like an M4A1 is not necessarily better than a M240-B. They are just tools and the operator of those tools combined with the factors that involve their use would vary greatly.
Thus edge, under the constraint of an objective trading methodology can be defined mathematically as:
E = (Average Win x Win Rate) – (Average Loss x Loss Rate)
If this yields a positive factor then you have edge. The key here is that the data in this calculation must be from objective execution of a system. Including tilted trading or other systems does not represent a true calculation of expectancy of that system but expectancy of your execution of that system.
This is an important distinction. This means that you can have an edge and still loose money. To make money it would require that you both have an edge and have the mental framework or skill to proficiently execute that edge.
As the market is random, and can do anything, at any time, an edge can disappear at any time. This is when review and the use of something like what I wrote on evaluating trader performance would be key to identifying the dissipation of edge.
This way of defining, quantifying, and then applying the term edge keeps its use objective relative to the objectivity of the noun it is being applied to. Thus if it is being applied to a person, well then it is only as objective as that persons interpretations, so it is not. But if you run a back-test of a script that executes prewritten conditions and that yields positive expectancy, you have edge. That edge can disappear at any time, but for now, your system has edge.
This is my initial thoughts on this topic, I am very much open to changing my mind. Please reach out to me on twitter with anywhere you disagree.