Edge
Edge is the difference between your estimated probability and the market’s implied probability. Positive edge suggests expected value if the price is fair and execution is possible.
Definition
Edge is the gap between your probability estimate and a reference price or probability, typically the market’s implied probability.
Example
If you believe an event is 65% but the market trades at 55%, your edge is +10 percentage points.
Why it matters
Edge is what turns forecasting into action. If you consistently have edge and manage costs and risk, you may generate positive expected value. Scoring (like Brier score) measures probability accuracy, while edge measures opportunity versus a reference.
Common pitfalls
Ignoring costs and liquidity: Even with edge, execution may be costly in thin markets.
Using noisy references: Last trade can be a bad proxy for consensus in thin markets. Prefer market consensus definitions like mid or VWAP.
Related
Edge connects to expected value and to market evaluation benchmarks used in skill scoring.