Having an edge

Honestly, it’s somewhere between a casino and sports betting.

People might say, "The market’s not gambling at all. It's regulated, and we can make predictions about the future. After all, you can go to college to become a financial analyst, but nobody goes to school to become a roulette player or sports bettor".

But comments like that just make me smile.

Behind the fancy suits, most investment analysts are just as much gamblers who often aren't prepared for the market's twists and turns. Just look at the banks, exchanges, and funds that have gone bust practically overnight. And these places were filled with Harvard and Wharton grads.

Markets are inefficient. If they truly priced in all factors, there'd be no money to make. No crises, no legendary wealth-building stories like Michael Burry.

When one inefficiency fades, another will pop up, and this cycle will keep going as long as human nature remains what it is.

No one truly knows what’ll happen with BTC tomorrow, next month, or a year from now. We can make high-probability guesses about the asset's direction, but the timing? That’s out of our hands. I might say BTC will hit $10,000, but I have no way of knowing when that’ll happen. It could be in an hour, or it might take a few years. And, of course, there's always a chance I’m dead wrong.

All I can do is make an educated guess.

Sometimes there are big wins in a casino, and the same goes for the markets. But if you’re doing a lot of active trading without a solid strategy, you’ll probably just end up underperforming the market - or even losing money over a few years.

The casino almost always has an edge over you. It’s all in the math. The more you bet, the more that math starts to hit your bankroll.

Say you play roulette and put your money on black. If you win, you get paid 1:1. Seems fair, right? You’d think you’d have a 50/50 shot, but in reality, your chance of winning is 48.65% because there’s also a green slot on the wheel.

But it’s not all bad. You might have noticed I said “almost” earlier. And it’s true - sometimes we can get a small edge over the casino. A great example of this is blackjack.

Back in the day, there were entire syndicates traveling the world to play blackjack. From Vegas to Sydney, from London to Cape Town, these people were looking to put their math skills to use in the best casinos. They hunted for advantages and inefficiencies in the games. Players would count cards, making small bets, and then, when the math was in their favor, they’d up their stakes by tenfold and walk away with a serious win.

But why did they have to travel the world ? Why not just stick to one casino - say, in Atlantic City - and keep raking in big wins? Well, casinos don’t like losing their edge to players. So, they’ll either lower the maximum bet or simply kick out profitable players and ban them from coming back.

With the markets, it’s the complete opposite.

Wall Street loves it when someone finds an inefficiency and makes a fortune. Suddenly, everyone’s talking about the “greatest trader of our time.” The trader then writes a book about how they’re the greatest, explaining their method, and just like that, the inefficiency vanishes. Other traders in this market “casino” can’t profit from it anymore.

Another comparison is sports betting.

Bookmakers operate similarly to their casino counterparts. They have an edge over bettors - not by fixing games (though it happens) but by using the same math.

Imagine Nadal and Federer in the final of a big tournament. They’re both in perfect form, with no losses, and their head-to-head record is 10-10. Each has a 50% chance of winning. The odds should be 2.0: you bet $100, you get $100 back. Seems fair, right?

But in reality, we see something more like this:

So, if we bet $100, we’d only make $90 in profit instead of the $100 we’d expect mathematically. This is where the bookmaker makes money. That $10 shortfall becomes their guaranteed earnings.

If ten people bet $100 each on Nadal and another ten on Federer, then if Nadal wins, the bookmaker pays out $900 in profit to those who bet on him and pockets the remaining hundred.

With bookmakers, it’s a similar story to financial markets and casinos. If you place enough bets, your account will gradually shrink because, mathematically, the bookmaker has the edge. You’ll end up losing more than you make.

And here we are again with that word “almost”. There may not be blackjack players here, but there’s another interesting opportunity.

Value betting - finding bets with actual value (similar to value investing). The idea is simple: bookmakers can’t perfectly assess the odds of every sports event, so sometimes you can flip the mathematical advantage in your favor.

Let’s say we’re betting on tennis again, but not a big tournament - just a local Alabama championship. Two players, let’s call them Biden and Trump, are competing. They’re evenly matched and haven’t lost a single game. Each has a 50% chance of winning. But, for some reason, the bookmaker has decided that Biden’s chances are higher than Trump’s, so the odds look like this:

See the advantage? With a 50% probability, we’d get a $20 edge over the bookmaker by betting on Trump. And the more bets we place like this, the more we’ll make over time.

But the bookmaker isn’t too different from a casino, they don’t like it when players have the math on their side. So, just like a casino, they’ll limit your maximum bets or even block your account. Maybe before, you could place a $1,000 bet, but now the maximum is only $10 - so making $2 per bet isn’t worth it.

How does all this relate to the markets?

S&P 500 stocks have been analyzed from every angle. Analysts make predictions daily, raising or lowering company ratings. Large investment funds spend billions on software, offices, salaries, and even a little cocaine, all to gain an edge. And then you show up and say, “Nvidia’s overvalued! The candle just hit a line I drew on my chart, forming a hammer pattern! The price doesn’t lie!”

But the price doesn’t care.

What about low-cap companies, though? Think you’ve found the diamond? Not exactly - it’s still a grind, just with smaller volumes. Here, you might have a slight edge since stocks like Clearfield (CLFD) aren’t watched as closely as Amazon (AMZN).

But simply reviewing a company’s financials, its leadership, and future prospects isn’t enough. You need a reason to take the trade. You always have to know just a bit more than everyone else. Steve Eisman knew a bit more, Greg Lippmann knew a bit more, Michael Burry knew a bit more.

The biggest gains in the stock market happen when someone knows just a little more than the rest - and can turn that knowledge into an advantage over the entire market. It’s essential to remember that everyone receives the same information, but only a few know how to interpret it correctly.

What can give you an edge?

The first thing that comes to mind is insider information. If you ask who’s most successful in the markets, I’d say it’s insiders. Poor traders and long-term investors only get the crumbs left over by them.

But only a small group of people have access to insider information, so let’s rule that out.

Before I list real advantages, I want you to remember one thing:

We’re not competing with investment funds. No matter how big of a “dolphin” we think we are, we’re not going to beat the sharks. Our goal is to have an edge over traders like ourselves and try to align with the bigger players. That’s our battleground.

If someone isn’t using the knowledge they have, isn’t putting in hours to find inefficiencies and anomalies, isn’t working on their trading skills, and hasn’t developed a solid understanding of what’s really happening - we’ll take their money.

Or rather, we’ll take what’s left after the funds and algorithms have already had their cut.

Our first real edge is math.

It’s the simple concept of RR. You should be making more than you’re risking. The optimal ratio would be RR 3 - risk 1% to make 3%. But as you can imagine, it’s not enough to just set up a 1:3 trade anywhere on the chart and expect a positive outcome.

There’s another important factor called win rate. In order to make money in the market, your system needs to have a positive combination of RR + win rate. This is figured out through backtesting and gathering data on every asset you trade. For example:

With a system, it’s like we’re blackjack players looking for an edge in an environment designed for us to lose. Is there an undervalued asset? Perfect. Is there a situation where the system works most profitably? Great, I’m opening a position.

In all cases, risk management protects us from the surprises the market throws our way. While we might lose a small portion of our deposit, we’re focused on finding the right setups and on the profits that accumulate over time - meanwhile, most people lose everything in an instant.

This is where we’re ahead of traders who don’t manage risks and don’t have a solid system.

The second real advantage is basic knowledge.

A lot of people overlook important details about the assets they deal with every day. If you're trading crypto, you need to understand how BTC moves. If you own Verizon stock, it’s good to know when they pay dividends and what the overall yield is. If you’re into 500x leverage and trading Forex, you should know how the next ECB rate hike or cut will affect the euro.

Even if you’re strictly trading based on technical analysis - the more you know, the better. You can say all day that everything is already priced in and you don’t need to follow the news, but if there are extra hints available, why not use them?

The third real advantage is understanding psychology.

Psychology is one of the cornerstones of long-term success. Of course, it’s great if you don’t fall into a panic after hitting a stop-loss and just keep trading like nothing happened. But what really matters is the ability to understand the psychology of the crowd.

Think about it. Who makes billions in the market? Banks, funds, and other big players. Who do you think they make their billions off of? Private traders and investors. The ones who knew just a little bit less than they did. The losses of some = the profits of others. The market is a zero-sum game.

Funds aren’t going to take money from each other. The guys at Goldman Sachs know that the assholes at JP Morgan, just like them, spend billions trying to find an edge. Although there are cases where one bank has screwed over another with things like default swaps. And it seems I mentioned one of those banks earlier, oops.

Professional poker players don’t play at the same table. They sit where there’s an easy target, like an Asian gambler they can profit off. Banks do the same.

How do banks show huge profits? Do you think they just sit around waiting for the price to hit a level before jumping in on a reversal? No, they wait for you to do that. The most reliable way to make money for someone who knows the game is to take it from someone who doesn’t.

Read "Game Theory" and you’ll understand why trading based on models that have been sitting in the public domain for years - on bookstore shelves, websites, forums, and in shared files - isn’t the best

What impacts your success ?

It all boils down to a simple phrase: being in the right place at the right time. I really regret not being able to cash in on the dotcom bubble because I was 2 years old. When the housing market crashed, I was 9. But at least in 2020-2021, I was in the right spot.

Don't forget about the importance of the right environment. If you're constantly showing your friends the nice trendline you drew through 3 peaks, and then talking about this genius reversal trade when the price hits that line, you're not going to get far.

Your environment should push you forward. Just like a poker player looking for tables with weak players, you need to find opportunities where many others miss them. When you’re working in a team, understanding what’s going on in the market and how you can profit from it - your time will come, and the results will follow. Markets evolve, new assets emerge, and trading systems change. Working as a team lets you cover more variables and improve your trading.

Private data. A simple subscription to ChadderFlow gives you more insights than all the technical analysis indicators combined. You’ll have to learn how to properly interpret the data and extract value from it. Finding the edge - going where others aren’t. It’s like searching for a needle in a haystack, if you will.

Learn to admit your mistakes. When I first got into trading, I refused to believe that the crossover of the 20-day and 5-day moving averages wouldn’t make me money. I was wrong. I didn’t believe that BTC would reach $70,000. I was wrong again. Every mistake made me realize that the market doesn’t care what you believe or think.

You can’t become a prisoner of your own thoughts and perspective on the market. Your ego can take away a huge chunk of your profits simply because you’ll keep looking for factors that confirm you're right, even when they have nothing to do with reality.

Don’t be afraid to make mistakes, don’t be afraid to admit them, and don’t be afraid to change your perspective. The markets are exactly where you can be shouting about shorts one day and opening longs the next. The key is having a justified point of view, not just acting on emotion.

And finally, but no less important: remember that this is a game. When money becomes the goal, the goal loses its meaning. You’ll always have an edge over a trader who borrowed money to try and make it big with trading.

Conclusion

The stock market is like a casino that has historically taken money from most people. You can either follow what everyone else knows, or look for an edge in places where others don’t even bother to go.

Those who have the edge aren’t going to share it. If you can show small but consistent returns, you’ll be set for life. And that comes from having just a little more knowledge than others. A small advantage.

Understanding one tiny inefficiency. Just a tiny one.