A trading edge is a set of entry and exit criteria that, when executed, will deliver profit trades that are sufficiently large enough to cover your trading costs and loss trades, and deliver you a positive return on your capital and time. The biggest strength of deploying an edge in the market is not the edge itself, it is the processes that define executing the edge. These processes will keep you engaged in the game. Focus on your processes and the outcomes will take care of themselves. Change your focus to the outcomes and your processes will break down which will lead to worse outcomes than you otherwise would have had. Breakdown of process leads you off on dead-end tangents and trial and error on the fly. This should be done during the preparation (research) phase, not during execution.
Most technical analysts are on a quest to find the ‘best’ edge. Just as a carpenter sees all things in terms of a hammer and nails, an analyst’s paradigm is that of analysing technical entries and exits. Most analysts spend so much time searching for the ‘perfect’ entry technique that they never actually get around to trading. They are wonderful at telling you what they would have or should have done, but unfortunately this is usually with the clear vision offered by hindsight!
The trader’s paradigm is that of executing trades according to their edge. The trader’s aim is NOT to find the BEST edge – it is to discover an edge that is positive and outperforms their chosen market / benchmark over the long term. They then deploy this edge to allow them to confidently engage the markets by risking capital to make profits – a trader trades, an analyst analyses. Analysis is just one of the techniques required to be a trader, it is a small part of the overall trading formula. Profitable traders realise that consistently applying their trading ‘edge’ to the markets with trust and confidence and employing strict money management and risk management rules is the key to long term success. At the end of the day, trading is a doing word – to make money we have to trade. We don’t make profit trades sitting on the sidelines trying to discover the perfect entry system. We make money by taking trades – cutting the losers and maximising the profit potential of the winners, in your chosen timeframe for trading.
The BEST edge will NEVER be found. Take my word for it because the BEST edge is perfection, 100% winners, which does not and never will exist in any game, let alone trading, (unless you do 1 trade, win and never trade again – but this defeats the object of risking capital to make profits unless you bet the house and ….. tempting!?). There will always be a better edge than the one you are using, either existing and in use somewhere on the planet or yet to be discovered. You will always be further ahead in the long haul by engaging the game according to a set of researched rules than being out of the game searching for the ‘best edge’ or being a spectator.
The fact is that well below perfection is OK to make money, and lots of it. Simple arithmetic proves this to us. Execution of that arithmetic has proved this to me personally and many of our customers over many years now. It is the understanding of what it means not to have to be right and hence what an edge is. An edge is probabilistic, by definition. Having 41.18% winners where the average winner is 2.68 x larger than the average loser net of brokerage and slippage, doing 6.85 trades a month over 6.06 years has delivered an annual compounded return of 24.2% compared to the ALL-ORDS of 10.2% and to the ALL-ORDS Accumulation Index of 14.4% over the same period. This information is updated regularly on our website at:
Opportunity cost through being a spectator from waiting to find a better edge or fearing using an existing proven edge will invariably be larger than the profit from the compounding of profits offered by time spent in the market using a proven edge. Lost opportunity leads to feelings of anger and frustration and causes silly mistakes to be made by those trying to make up for lost opportunity. The spectator will always be behind on the learning curve compared to the player. However, “look before you leap.”
My message is: find, through your own research & development and/or otherwise, a credible proven edge, engage the game and get on with honing the remaining execution skills required to be consistently successful before time has passed you by and you have missed the opportunity of achieving compounding profits.
Like our blog? Share the love!
8 people like this post.