Do Retail Traders Have an Edge?

In order to win in trading, one should have an edge, i.e. have a slight advantage over others. This means having information or strategies that the majority of other traders don’t have.

There are a few different ways to get an edge in the trading world. One is by having better information than the competition. For example, if you know that a company is about to release bad news, you can short the stock before the news comes out and make a profit. Another way to have an edge is by being faster than the competition. For example, if you see that a stock is rising quickly, you can buy it before it goes up too much and then sell it at a higher price. Finally, you can have an edge by being smarter than the competition. This might mean having a better understanding of the markets or using more sophisticated trading strategies. These methods of acquiring an edge, however, often belong to the world of institutions and professional investors who can afford to spend money on the latest technology and hire the greatest talents.

So can retail traders still have an edge? Reference [1] proposed a framework for retail traders to gain an edge in trading,

  1. Hunt for Winning Strategies
  2. Combine Winning Strategies into a Portfolio
  3. Calculate Expected Balance of the Portfolio
  4. Calculate the Probability the Portfolio Will Result in a Net Profit

Like a casino hunting for advantageous games, the first and most arduous step of TGE is hunting for investment strategies that provide a statistical edge. Once strategies are found the second step highlights how a set of positive strategies can be combined into a portfolio like a casino offering multiple games on their floor. Step three shows the retail investor how to calculate their portfolio’s expected balance, and step four shows the investor how create a probability distribution for their portfolio under certain assumptions.

The paper tackled a very valid question, i.e. “how can retail traders have an edge?”. However, we believe that the proposed framework is not realistic. Specifically, step #1, “Hunt for Winning Strategies” would require an enormous amount of time and resources.

Let us know what you think. How can retail traders develop an edge in trading?


[1] M Haines, The Gambler’s Edge – A Theoretical Framework to Trading Securities, 2022, Utah State University

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