What does it really take to have a trading edge?

What does it really take to have a trading edge?


What does really it take to have a trading edge? The word ‘edge’ gets thrown around a lot on the internet but most traders have a wrong understanding of what an edge in trading really is and how trading with an edge can be achieved.  This article explains what an edge is, how traders can quantify if they have an edge and it shows what it takes to build one.

What is an edge? The dictionary defines the term edge as follow: A margin of superiority; an advantage. In terms of trading, this means that you have a way to identify trading opportunities that will provide you with a positive outcome over the long-term. A trader who has an edge has developed a method  to trade the markets in a way to come out ahead. Having an edge does not mean that you will only have winning trades, but that your winning trades will offset your losses in order to make money consistently over the long-term. [bctt tweet=”https://www.optimusfutures.com/tradeblog/archives/trading-edge/ #futures $STUDY #trading “] Components of a trading edge Another mistake many traders make is that they believe that an edge only consists of knowing how to identify entries. Focusing exclusively on entry methods is a problem we have discussed earlier and the trader who neglects the importance of other trading components will usually experience inconsistent trading results. In order to develop a sustainable trading edge, you have to be clear about the following points:

  • When do you trade? What are the markets you understand best? Which time-frames work best for you? How does the perfect trade look like? What are the things that have to happen before you enter a trade?
  • When you don’t trade The professional traders know that preservation of capital is a top priority. Staying out of uncertain positions and knowing when you have to “sit on your hands” is just as important as knowing when to trade.
  • What do you do with your trade? Once in a trade, traders often lose their heads and don’t really know what to do. A trader with an edge knows exactly how to protect his position, when to trail his stop, when to cut a loss early, when to let his trade run and how trade exits look like. A trader with an edge does not leave anything to chance and he has a “game-plan” ready for all possible scenarios.



How do you know if you have an edge? Quantifying whether you have an edge is usually not as easy as it sounds. Often you can read that you should verify that your trading strategy has a positive expectancy during demo-trading. However, demo results and live results can look very different. The same holds true when using back-testing software – when you have the possibility to fast-forward price data at your will, quantifying a trading edge is usually impossible. Only by answering the following three questions you can effectively determine if you have an edge or not:

1) Did you make money in the past? Although past performance is not necessarily indicative of future performance, it is the starting point. If your account balance is sharply moving down, it is rather unlikely that you have a trading edge. However, even if you are currently not making money as a trader, it does not ultimately mean that you have a ‘bad’ trading strategy and that you should stop. We will explain what this means in point 3.

2) Can you repeat your trading success? Having an edge also means that you can repeat your success and that it wasn’t the result of pure chance. If you are following a rule-based trading system, it will be easier to repeat your past trading performance. The same holds true if you trade automated trading strategies. On the other hand, when you are a discretionary trader, validating your edge can take longer because your trading strategy is often more subjective. If you are never certain about the viability of your edge, you won’t feel too confident about it. To whatever degree you lack confidence, you will experience fear. – Mark Douglas

3) What are you doing to sustain your edge? We briefly mentioned it in point 1. Past performance is not indicative of future results but even if you currently have found a way to make money, it does not necessarily mean that it will last forever. Financial markets are constantly changing and the professional trader is always looking for ways to improve his methodology to sustain his edge. On the other hand, even if you are currently not making money, it does not mean that you should look for a different system. No system will work from the start and the trader with an edge understands that it is his responsibility to make it work.

Are you ready to have an edge? This might sound like an odd question to ask, but it’s true. As we have said before, an edge is not something you find on the internet in form of an already working system. An edge is something that has to be developed and maintained. If you are ready to make a change in your trading, we urge you to stop changing trading systems and instead dedicate all your efforts towards making the one you have work. Improve the way you define entries, identify and eliminate negative trading behavior, improve your trade management and optimize your trade exits. If you aren’t seeing the results in your trading you have been looking for, maybe you should approach it from a different angle.  

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