OnlyTicks

Troy, but instead of Brad Pitt, it’s Elliot Page.

JUST IN: “The Odyssey” debuts to 98% on Rotten Tomatoes — highest rating of Christopher Nolan’s career.

GPT 5.6 just deleted my entire production database of my $10,000 MRR SaaS!! I have never seen a model do this; I just lost all my customers and need to refund more than 50k today !? SERIOUSLY?

GPT-5.6-Sol just accidentally deleted almost ALL of my Mac’s files. And this is why I trust Fable 1000x more.

Today’s topic is about edge erosion. A topic I almost never think about, but according to my discord room it’s a popular topic on fintwit, so might as well talk about it. I believe, fundamentally, edge erosion does not exist, at least not in the way people think it does. The basic argument people make is this: In small caps, people discover some type of technical pattern or some type of data-driven “edge” in a spreadsheet, and use it to their advantage. Once the data driven pattern gets repeated too often, or the information becomes too “well-known” across social media, the edge “disappears” or gets eroded. As if there is a secret cabal of market makers keeping tabs on all social media to find out which information is becoming too disseminated or well-known. Now one thing that absolutely exists in small caps is how market makers abuse recency bias in day traders, especially after a major outlier/extreme event. I will talk about this some other time. But this is not the same as edge erosion. The reason edge erosion doesn’t exist in small caps is because edge is not derived from trading some repeatable technical pattern or “following the data” (data, which in 99.9% of situations, is oversimplified and over-generalized, to the point of being near useless. For example, did you know premarket gappers often fade? Wow!). Btw, true fact, the more commonly held a belief exists on small cap twitter, the less edge it produces. You could even say commonly held beliefs on here produce negative edge. Since, after all, 99% of people in this space never make money. True edge comes from understanding how liquidity in small caps works. And that is the only constant changing force, liquidity. As liquidity changes (this includes both the liquidity in the small cap market itself (the “conditions”), and liquidity in the individual stock you are trading) – the patterns change. Or I should say, the potential for certain liquidity moves to happen changes. Because, after all, low float small cap stocks are near empty liquidity vehicles. When they are not “rigged”, they trade insanely low daily volume with near random swings in price. They have little-to-no participation and their order books are empty - until the big volume comes in. But the stock market is, fundamentally, very simple. First, there is the order book, which represents all of the bids and asks for a particular stock’s current market. And then there is the tape, the actual orders being executed. In order for the stock price to go up, you must buy through the asks; and for it to go down, you must sell through the bids. In small caps, what ultimately determines what pattern gets executed is the amount of liquidity present in that stock at that time, combined with what orders exists on the order book. And your job as a small cap trader is to analyze, in real-time, the liquidity situation of the current stock and determine what bearish and/or bullish liquidity patterns are possible at that moment in time. And here’s the thing, market makers cannot just do whatever they want. They are bound by the laws of liquidity, which work, in many ways, very similar to the laws of physics. For example, if last year, it rained a lot in your home town, then the next year it didn’t, does that mean the laws of physics changed? Of course not. The change is dependent on the various factors which influences how much rain you get in your area. There is no secret market maker weather man who is pulling the puppet strings, changing the weather when things get too “normal” or “common.” Small caps are the same way. Different types of stocks have different types of order books, and therefore price action. Penny stocks move in certain ways, $2-5 move in certain ways, $5-10+ move in certain ways, etc. Their order books limit what MMs can potentially do. Btw, Chinese small cap order books are notoriously empty. And in periods of high liquidity, they will abuse this fact to gap up a stock a huge %, often on relatively little buying power, get shorts interested in it, then squeeze higher through and even emptier order book as the price increases. Recent stocks like TDIC and INHD do not break the laws of liquidity. They are abusing how much liquidity is in the system + that specific stock, and taking advantage of an empty order book to break people’s expectations (the same expectations your data graciously points you towards) to squeeze higher. However, there is good news. In order to push a stock up, say 500%, or 1000%, or whatever big number you can think of, you must accumulate first. And thanks to the laws of liquidity, there are only so many ways you can accumulate a stock. Because in order to push a stock up 1000%, you must accumulate a smaller % of that first. And even though there is a lot of variance in how this is done, it is not random. Which means by studying accumulation patterns, there are times where you can be very bullish a stock up multiple hundreds of %. And times where you will be very bearish. It’s not what the gapping % is, it’s HOW it gets there. To truly understand liquidity, you must analyze HOW stocks move. And unless you are some Ph.D level math genius, I recommend NOT starting with data. There is too much risk where, regardless of how many data points you have, that you are generating an incomplete picture which will, at best, give you a tiny sliver of how liquidity actually works. No, you must study charts. Especially across multiple time frames. The most common in small caps are the 1m, 3m, 5m, and 15m. Sometimes 30m/60m are useful on longer MDRs. And you must understand how various patterns across the different times frames work in tandem with each other. There are many times when stocks produce a “bearish” pattern on the 1m chart, only to simultaneously produce a “bullish” pattern on the 3m or 5m. There is an ebb and flow to liquidity. A delicate dance which the market maker must maintain. Your job is to analyze the situation and figure out what is possible based on what you know about that ticker at that point in time. A combination of technical factors such as common “algo tricks” on different time frames, along with other various important factors to know (float, price point, any catalysts/theme, overall “conditions” of the market that day). Btw I will talk about market conditions sometime later. It’s a quite complex topic that deserves to be talked about piece by piece. Anyway, I think I rambled long enough. I truly believe edge in small caps comes from understanding how liquidity works. When I look at charts from when I started in 2019, and then every year until today, I see the exact same shit. The only thing that really changes is the amount of liquidity present in that stock at that moment in time. Everything else is the same. MMs are bound by what they can do, I would suggest studying it.