Some say that discipline is the key to market success. While necessary, discipline is not enough. Otherwise, all quant systems would be always profitable. This is hardly the case. Market edges get erased all the time.
The statistical definition of a market edge is having an approach with positive expectancy.
If you have a 50% success rate and your average winner is two times bigger than your average loser, then you have an approach with positive expectancy.
Josh Brown says that any market edge is ephemeral. It cannot be sustained for long and only a few institutions have managed to adapt successfully to the constantly changing markets. Finding new edges on a regular basis might be very unrealistic when you manage billions of dollars.
Some market methods provide a structural market edge. A structural edge is an edge that doesn’t disappear forever, but it has a cyclical success rate. It goes through periods of making money, followed by periods of making no money. Structural edge is based on market forces that have always been a fundamental part of what moves prices: momentum, value, fear of missing out, fear of losing, range expansion and range contraction, the tendency of the market to underreact to genuine surprises and overreact to known threats.
Some say that the definition of insanity is doing the same thing over and over again and expecting different results. If you do the same thing over and over again in the market, you are guaranteed to get very different results. The same approach that makes a lot of money in a raging bull market is often a losing proposition during range-bound, choppy markets.
Trading or investing are not that different from any other business. You have to sustain a competitive advantage in order to continue to grow.
Markets change all the time. Great investors and traders innovate and adapt to constantly changing market conditions. The change might take the form of taking a break and moving to the sidelines or coming up with a new edge.
The main point of my latest book is exactly that: different setups work in different markets: Top 10 Trading Setups – How to find them, when to trade them, how to make money with them.