What is an edge in trading? An edge in trading is simply a process that allows your winning trades to add up to more than your losing trades do over the long term. An edge can be that your winning trades are so large that they make up for your losing trades and more to make you profitable. An edge can also be a high winning percentage where your wins and losses are approximately the same size but the quantity of winning trades are more to make you profitable.
Here are ten tips to give yourself and edge in trading.
- Research historical chart patterns to understand what is possible in the market and how markets change from uptrends to downtrends, and from volatile to range bound. Use this insight to structure profitable trading systems using price action signals.
- Backtest your trading signals to see if they had an edge in the past.
- Avoid random trading, opinions, and predictions and only trade a quantified trading system that has an edge over other traders,
- Keep your losses small by cutting your losses short with a stop loss set at a technical level where price should not go for your trade to stay valid.
- Let your winning trades run to your profit target when there is no reason to exit to make your wins as big as possible.
- Use a trailing stop to lock in profits while they are there in a winning trade to avoid giving back open profits.
- Ensure that your risk to reward ratio is at least 1:2 on entry so you have the potential to make at least twice as much on a winning trade than you lose on a losing trade. With a 1/2 risk/reward ratio you can be profitable with a 50% win rate.
- Go with the flow of least resistance. Follow the direction of momentum and the trend on the chart, don’t fight it.
- Become and expert on your own trading strategy and watchlist.
- Trade a position size that enables you to survive a losing streak and also avoid the risk of ruin.
A trader can also have a psychological edge over others through discipline, perseverance, emotional control, and not letting their ego override their trading plan.
The biggest thing that can wipe out any edge you develop in trading is allowing a trade to become a big loss. All losses should end in one of four ways, a small win, a big win, a small loss, or a break even trade. Proper position sizing and stop losses should remove big losses as one of your trading possibilities.
The most simple edge a trader can have is managing their trades so they are either big wins or small losses.
