Developing a Trading Edge
If you want consistent success as a trader, it is crucial to develop a trading strategy that has an edge in the market.
No matter your goals in trading, without an edge you won’t be able to make money in the markets.
Despite this, most traders have no idea what a trading edge is, let alone how to develop one. So let’s fix that in this article.
What is a Trading Edge?
An applied technique or approach that gives an advantage over the rest of the market is a trading edge. It doesn’t have to be complicated, sometimes simple rules are enough to gain an edge. Your edge could even be your consistency.
What is a Zero Sum Game?
Most games are zero sum, including chess, tennis, and poker. This essentially means that the amount gained by one player is equal to the amount lost by another play. Points can only be exchanged, not destroyed or created.
How to Develop an Edge: A Solid Trading Plan
You can’t have an edge unless you have an approach to the market. To develop an edge, you must first start with the lens in which you view the market. You should take some time to think about your beliefs of the market, and then detail your goals as well as your capabilities. If you are working full-time in an office job, it might be silly to try and trade a scalping strategy. But if you have limited capital, swing trading also might not be ideal. You can read more about these points in our article How to Choose a Trading Strategy.
Once you have figured out the best approach for you, then you can start to test, observing and studying the market, paper trading, and eventually working yourself into small positions (perhaps with the aid of micro futures contracts).
It is worth keeping in mind that even the most profitable of trading strategies will have losing periods, and that brings us to our next point.
Making steady gains in the markets requires not only a trading edge, but also the discipline to apply it on a consistent basis. If you are unable to follow your trading strategy, then you will be trading blindly and leaving your trading results down to chance alone.
But trading isn’t about your last trade, it’s about the series of trades over time. Following your trading plan and having the discipline to apply your edge consistently can be an edge in itself.
It’s not enough to have a great strategy if you overtrade or trade too large for your account balance. Trading is very much about surviving to trade another day, so having risk management rules that keep you out of trades during suboptimal trading sessions when your edge may not be valid, or simply walking away from the screens after too much losses in a row.
Sticking to the general rule of only risking 2% per trade is also a good principle to live by. Read more about How to Measure Risk in Trading.
Backtesting and Forward Testing
Many trading platforms offer some sort of backtesting feature. Data can (and should) be divided into various sets to facilitate in-sample and out-of-sample testing, giving traders a realistic and efficient means of evaluating a trading strategy.
To determine the feasibility of a trading system, it is essential to analyse it based on clean data and avoid over-optimization of the trading rules.
Adding forward testing to the out-of-sample testing adds another level of insight into the robustness of your strategy before releasing it into the market and risking real money.
You can read more about backtesting and backtesting in our article The Complete Guide to Algorithmic Trading.
Use Order Flow Logic
Using a top-down approach based on order flow trading principles, means you can base your strategy on the logic of market microstructure, and combine that with your market experience over time.
You will learn a lot about the power of order flow at Bookmap. If you want to dive right in, check out our order flow education course, free on YouTube.
Learn From The Best
To learn to paint, it is often said you should first study how the greats painted. Only then can you start to improvise and develop your own style. Trading is very similar. Markets have been around for a long time, and there are many time-tested rules for approaching the market.
It can also help to join a trading community such as ours (free on Discord). Traders love sharing their knowledge, and you can learn a lot from more experienced traders.
How to Keep Your Trading Edge
Keep a Trading Journal
You should always keep a trading journal to know if you are managing to follow your trading rules. It can be also useful for spotting patterns in your results. Perhaps every time you trade during a news release you lose money, so then you can just add a rule to avoid trading around news releases, and suddenly your results have improved.
Tracking things such as asset, time and date, direction, setup, as well as general comments or emotional status during the trade is common.
Monitor the Market
Simply monitoring the market on a daily basis will get you in the groove and give you a feel for the ebb and flow of capital markets.
Even if you are not taking trades, your subconscious mind will be taking in the information and you will become a better trader with time.
Test your Trading Edge
Good traders are very scientific. You can test your trading edge with backtesting as mentioned, but you are also essentially testing your edge every time you make a trade: first when you put it on and hold it until it hits your stop loss or target, and then over time as you collect a series of trades in your journal.
Combined, this acts as a test of your edge in market environments and at different fractal levels of time and price, giving you insights into what your edge really is—and more importantly—if it still exists.
What a trading edge actually is will be perceived slightly different for each person, but one thing is for sure: you can’t do it without the right tools.
Bookmap was built to help traders win. The platform comes with an array of tools for uncovering the market. Jump in for free today.