Why Does Everyone Think That They Need a Trading Edge?

close up a man checking stock market on tablet, smartphone
•••

Kidsada Manchinda/Moment/Getty Images

 

A trading edge is a certain approach, observation or special technique that, in theory, gives a trader some type of cash-generating advantage over others in the market. A vast number of books and papers exist on various trading techniques, but since many people learn and apply this same information, the chances of it providing an edge for any individual trader become extinct very quickly.

The Popular Belief

The popular belief is that an edge is something that a trader knows or uses, that gives them an advantage over the market, or over all of the other traders. For example, a trader might believe that using a particular indicator (e.g. the Relative Strength Index) in a specific manner, such as making short trades when the RSI is above 84, gives them an edge over traders that are not using the same indicator in the same manner, such as traders that make short trades when the RSI is above 70.

Many new traders spend literally years trying a variety of different indicators, a variety of different indicator settings (e.g. a length of 10, then a length of 15, etc.), and a variety of different chart settings from time-based charts, ticks-based charts, or volume-based charts, in an attempt to find the combination that gives them their edge.

Finding Your Edge

Some traders haven't heard of the edge concept and are probably asking themselves if they have an edge, or if they need to get one. A few guidelines can guide traders in the right direction if trading edges truly exist, that is:

The edge must be realistic, and cannot involve any magical thinking. A trader must understand that his edge may not work 100 percent of the time and that he could easily make a large sum of money using his edge, and then enter a season where his edge no longer works. Committing to the process of becoming an ever-evolving, improving trader might qualify as the best edge.

If you feel you've come up with your edge, you must test it out by clearly defining the rules, then testing them. This could involve backtesting with historical market data and paper trading.  

The Reality View

The truth is that there are traders who believe that they have an edge, and there are traders who believe that they need an edge and are consequently looking for one, and there are traders who laugh every time someone mentions an edge, while they go and make another profitable trade. In other words, there may be no such thing as an edge, not over the market, and not over other traders unless you consider having received good trading instruction as an edge.

Successful trading is not about being in competition with the market or with other traders, and quite the opposite is the case. Successful trading is about being in agreement with the market, and being in agreement with other professional traders, specifically professional traders.

Many new traders will disagree with this, and if you are one of them, consider that the traders who believe that they have an edge will never tell any other traders what trade they are about to make because by doing so they will be negating their edge. Conversely, professional traders will tell other traders what trade they are about to make without any hesitation, because other traders knowing about the trade, or making the same trade, does not affect the potential of the trade at all.

The Never-Ending Search

If you are a new trader that is just starting the endless search for your edge, or if you are a trader that has already spent several years looking for your edge, stop doing so before you finish reading this sentence, because the search for a trading edge is as futile as the search for the holy grail of trading.