By Taro Hideyoshi – The winning traders are not ones who have never lost. To be a winner in trading game, you have to think in terms of long run. Hence, if you want to be one of winners, you have to find trading methods that work over the long run what is known in gambling as an edge.
By thinking in terms of long run, one question that you ask yourself is “What happens if I keep doing this?” If there is more chance to win the game, it is a positive expectation game while the negative expectation is vice versa. The negative expectation game is the one that you have more chance to lose.
An edge refers to one’s systematic advantage over an opponent. Without an edge in games of chance, you will lose money in long run.
So, what about your trading? Consider your trading method, what happens if you keep using it? If it will give you profits over long run. That means you are trading with an edge.
To find your trading edge, you need to locate entry points where give you greater than normal probability that market will move in the same direction with your trades and within your desired time frame. Besides entry strategy, as I have always mentioned that good trades also comprise of exit strategy. Therefore you have to pair the designed entry with an exit strategy in order to maximize your edge.
Entry strategy must be paired with appropriated exit strategy. Thus, trend-following entry strategies can be paired with many different types of trend-following exit strategies. Also, swing trading entries can be paired with many different types of swing exit strategies and so on.
Elements of an Edge
To get more understanding of an edge, let’s dig further into the components that make up the edge for a trading system. The following are the elements of an edge described by Curtis M. Faith in his book “Way of the Turtle“.
Portfolio selection: The algorithms that select which markets are valid for trading on any specific day
Entry signals: The algorithms that determine when to buy or sell to enter a trade
Exit signals: The algorithms that determine when to buy or sell to exit a trade
It is possible for an entry signal to have an edge that is significant for the short term but not for the medium term or long term. So, find the signals that give you an edge to your trading styles, personality and money management.
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
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