What is the Trader's Edge?

"and how do you find it?"

To stand any chance of success in trading – your system must have an edge.

True or false?

Undoubtedly true. Without an edge you will have no better than a random chance of success. This means you will probably break even - except that you will have to pay trading costs and price slippage every time you enter or exit the market.

Of course, your next question is – how do I find an edge?

You might also be wondering why there should be an ‘edge’ to be found?

That is because the markets themselves are not random. They are affected by all those who trade them. The traders are human beings with human tendencies and inclinations and naturally, they react as human beings – often irrationally and with emotion.

These human characteristics are blended into the causes and effects influencing the movement of market prices and there is scope to exploit the resulting non-random price behaviour.

Opportunities to find edges are spread all over market prices and wherever you can find an edge, you are at liberty to take advantage of it. There is nothing that says one place or method is better than another. However the most fruitful sources are likely to be found where there is a change in price direction.

Before you even consider using any system rules – which can be obtained in many ways (perhaps you even created them yourself) - you will test them to see what results they produce.

You are looking for what is known as a ‘positive expectation’. This just means the rules can demonstrate they are capable of producing a profit. If they do so, they are showing you that they have an edge!

Trader’s testing methods must allow them to look at the way individual trades enter the market and how they ‘ride’ the market prices before exiting.

When looking at trade performance at this level, traders usually notice ways to adjust rules ‘parameters’ to improve system results. Typically, rules are modified and tuned in this way to produce acceptable systems – systems that have an edge.

Finding an edge is only a starting point on the road to trading success – but a vital one.

 

Modus Trading
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Copyright David Bromley 2006
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