Small Edges with Consistent Returns

Jul 11, 2008: 12:02 PM CST

Dr. Steenbarger detailed the notion of the “Small Edge” in his recent post “Small Edges, Consistent Returns.

In the post, Dr. Brett runs a variety of scenarios through Henry Carstens’ P&L Forecaster to compare results across having an edge (or lack thereof) of a couple of percent, or having a win/loss ratio of .9, 1.0, and 1.1.

Read through the various scenarios, and the various outcomes through probabilities using these parameters, contained in his post, and then try out your own parameters on Carsten’s P&L Forecaster – it’s an excellent tool for potentially eye-opening insights.

Steenbarger concludes:

What this tells us is that even small edges in the market generate consistent returns if they are consistently acted upon. This is the message of Henry’s Axiom of the Small Edge: you don’t need a huge edge to make good money; you need to act consistently on the edge that you have.

Our little exercise also shows you how fragile these things are. Just a dip in win percentage from 52% to 48% matters quite a bit over time. Changes in market conditions, changes in our psyche: it doesn’t take much of a nudge to make us profitable or unprofitable.

Be sure to visit back for his follow-up post, which will examine risk/return across various scenarios.

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