Does Your Trading Strategy Have an Edge ?

By | September 10, 2014

Having a trading strategy with an edge is often mentioned in trading literature as a prerequisite to success. Despite this fact, I think it’s still a misunderstood concept. Why am I saying this? Well, ask yourself, or other traders you know, what exactly is your edge in trading? In other words, what makes you think that over the medium and long-term you’ll end up with more money in your account than you started with? Common answers to that, apart from a blank stare followed by total silence are the indicators that I am using, the bar/candlestick patterns on daily charts (because that’s what ‘educators’ recommend :) ) or the discipline of risking ‘only’ 2% of equity on each trade. With this kind of responses, there is no surprise that 90%+ of traders are losers.

The problem lies in the fact that those are merely tools. I’ve never heard or read about a successful trader saying that the key to his long-term success is to enter a long position when RSI is at 20 or a short position when he sees a pin bar on a daily chart. What gives a trader an edge is how he puts together all the elements in a workable and logic strategy. This process will take lots of time and hard work because it’s not easy to find a successful trading approach that is right for you.

My advice to any trader out there considering opening a live trading account or buying trading education is to ask this question: What is your edge? If you don’t get a logical response to that, you’re not ready to go live or the educator is selling worthless junk. And because I started this, I think it’s only fair that I answer the question as well. My strategy’s edge comes from 2 main directions: Firstly, keeping losses small: I take a maximum of 2 trades a day and my maximum loss targets are 1% of equity per day, 2.5% per week and 10% per month. So in the absolute worst case scenario, where I would 1. take all trades a month and 2. all of them are losers, my loss would be 10%.

Secondly, maximizing winners: most of the times, there are a few losers, a few winners, with the net result slightly negative or positive. But there are also times when larger moves (the term ‘large’ is relative to the time frame used) allow me to pyramid the small initial position into big profits, with a final risk/reward ratio of more than 1/30.

I hope you found this useful and thought-provoking.

PS: If you haven’t figured out why trading ‘educators’ keeps touting the superiority of daily setups, shoot me an email. :)