Have A Calculated Edge

Do you have a calculated edge?

It is important to have an edge as a trader.  But, what is an edge?  And how do I act on it to minimize risk and profit consistently.

The generic definition of an edge is this: an edge is a higher likelihood of one outcome happening over a second outcome.

With this definition in mind, let’s take a look at a simple scenario that illustrates an edge.

If you play heads or tails, with a friend, with a coin that you know is weighted more on one side (heads by 70%) than the other (tails), does it make sense to try and predict whether the number of heads will exceed the number of tails by the end of the day?

No, because each outcome is not random, you know that over time if you keep calling heads you will be wrong more often than you are correct.

The exact same can be said about trading. Simply put, once you have found an edge, all you have to do is keep applying that edge to the market whenever it presents itself.  Different traders hold different kinds of edges.  The type of edge you hold matters little.  What matters is that your edge is profitable and can be applied consistently.  And, if you have multiple edges, that definitely matters!

There is no point in guessing whether the next trade is going to be a winner or a loser. Guessing is futile.  Don’t guess your way into a soupline. When your edge is present, you don’t need to guess what the ruling market will do next.

Do you have a clearly defined edge?

So what is my edge?  I have multiple edges since I prefer a good nights rest …and need my beauty sleep.

My #1 edge is Mindset –I know that money is a means and not an end.  I know that markets rule 24 hours a day, non-stop.  Missing a trade means nothing, losing a trade means little.  I know there are many more trades that are correlated  and time-lagged to any that I miss or lose.

My #2 edge is Money Management  —the money management model I developed over the years minimizes risk and adapts to trader performance.  When I take a loss, it is minor …gains always exceed losses.  My model is based on the work of great minds like:

  • Ed Thorpe
  • Claude Shannon
  • John Kelly, Jr.

At least one of those names should ring a bell.  Afterall, Claude Shannon (M.I.T.) is the father of modern Information Theory!

My final edge is market analysis which I learned from taking the first two CFA exams; as well as learning entry & exit points according to price charts (technical analysis).

What is your edge?

When thou sittest to eate with a ruler, consider diligently what is before thee…              –prov XXIII

U.S. Nonfarm Payroll (NFP)

All about the Nonfarm Payroll (NFP)

Always check the Economic Calendar

Later today, there will be released two separate surveys in one report. The first is a survey of 60,000 households (called the household survey). Workers are counted once, no matter how many jobs they have, or whether they are only working part-time. To be counted as unemployed, one must be actively looking for work. Other commonly known figures from the Household Survey include the labor supply and discouraged workers.

The second survey is the Establishment Survey –a survey of over 557,000 worksites. Nonfarm payroll employment is the most popular and well-known indicator from this survey. Business establishments in the nonfarm sector report the number of workers currently on their payrolls. Double counting occurs when individuals hold more than one job.  Always keep in mind that this is just a single indicator.  One that appeals to the emotions of many traders, but is hardly representative of the overall economy.

Market reactions to this indicator are usually dramatic.  The employment data given is comprehensive on how many people are looking for jobs, how many have them, what they’re getting paid and how many hours they are working. These numbers guide, not determine, the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.

The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

By tracking jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it’s a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline – boosting up bond and stock prices in the process.
The employment situation is the primary monthly indicator of aggregate economic activity; it encompasses all major sectors of the economy. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. The Fed has emphasized that it is overall labor market conditions that matter – not just a specific number.

The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.

The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates.

The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.

Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.

When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.

Gains in average hourly earnings represent wage pressures. These figures aren’t adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.

90% of the time, I close out 90% of my positions the week of the NFP release.cropped-old-map-36.jpg