What is an Edge (How to engineer an Edge)

I believe Edge makes people successful, but what is the Edge?

We have defined “Edge” in the Note “The Holy Grail Formula”,

Edge =(1+ Reward/Risk)*P(w) -1

P(w) is the probability to win, or Win%.

We also said that Edge must be positive if you want to be successful. If your Edge is negative, don’t waste your time.
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Do we have an Edge if we go to a Casino and play Roulette?

Let’s calculate, Roulette has 38 numbers, and if you bet the number correct, you win 36 times of your bet. So,

P(w) =1/38
Reward/Risk = 36/1

Edge = (1 + 36/1) * (1/38) -1 =37/38 -1 = -1/38

The Edge is NEGATIVE !, that means we don’t have an Edge in playing Roulette.

I like play stock option vertical spread. Play options allows me to easily calculate Reward, Risk, and Probability. For example, if you play a $5 spread vertical, currently is selling for $4. That means you risk $4 to make $1, and at the moment I purchase the spread, I assume my Edge is zero, so

Edge =(1+1/4) * P(w) -1 =0, thus

P(w)=1/(1+1/4) =80%

What is saying is that you have 80% chance to be right when you risk $4 dollar to win $1 dollar.

Now, if you are a good chart reader, and you don’t have to risk the full $4 before you think the position is wrong, if the chart turns sour, you want to get out before you lost the full $4 dollar.
Let’s see, so, you are only willing to risk $2 dollar to win $1, and if the estimation of P(w) is correct. Then,

The real Edge=(1+ ½) *80% -1 =1.2 -1 =0.2
Booya!, we got a positive Edge. We are engineering a positive Edge by adjusting the Reward/Risk ratio.

That’s my main strategy to play option with Edge. I will provide more details in the later date.