In theory, a trading edge is a certain approach, observation, or special technique that gives a trader a 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 a trading edge for any individual trader become minimal very quickly.
Finding an edge, and what that really means, can help you decide whether it is worth investing your time in finding one or deciding whether it is attainable or would be usable.
- A trading edge is a technique, approach, or trading method that a trader believes gives them an advantage over the market and other traders.
- Many traders try to find an edge by experimenting with known techniques, looking for ways to make it work.
- The best ways to get an edge on the market and traders are through education, experience, and effort.
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 all the other traders. For example, a trader might believe that using a particular indicator (e.g., the Relative Strength Index, or RSI) in a specific manner—such as making short trades when the RSI is above 84—gives them an edge over traders who are not using the same indicator in the same manner.
Many new traders spend years trying out a variety of different indicators or different indicator settings (e.g., a length of 10, then a length of 15, etc.); they also try a variety of different chart settings from time-based charts, tick-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—upon hearing of it, they might begin to ask themselves if they have an edge or if they need to find one. A few guidelines can point traders towards any trading edges if they exist:
The edge must be realistic and cannot involve any magical thinking. A trader must understand that an edge might not work 100% of the time—it is possible to make a large sum of money using this edge and then enter a period where the edge no longer works.
Committing to the process of becoming an ever-evolving, improving trader might qualify as the best edge.
If you feel that you've come up with an edge, you should test it out by clearly defining the rules, then applying them to historical market data and paper trading.
A Reality Check
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. There are traders who laugh every time someone mentions an edge while they go and make another profitable trade. In other words, there might be an edge you can find and use, or not.
Many traders consider having received some good training and instruction as an edge. In fact, this might be the edge that edge-hunters are looking for. Successful trading is not about competing with the market or with other traders; quite the opposite is the case. Successful trading is more likely to be achieved through sound risk-management practices and a healthy dose of patience. It is often more useful for retail traders to concentrate on controlling their own decision processes rather than making decisions based on things beyond their control.
The reality is that chasing a big payout in this manner while investing is not unlike a gambling addiction.
Many new traders will disagree with this. If you are one of them, consider this: traders who believe that they have an edge will never tell any other traders what trade they are about to make. By talking about it, these traders believe they will possibly negate their edge.
Conversely, professional traders will tell other traders what trade they are about to make without hesitation; because when other traders know about the trade or make the same trade, it doesn't affect the potential of the trade at that moment in time.
Over time, prices can be affected by aggregate supply, demand, and investor sentiments—but one investor's belief in an edge will not change anything.
The Never-Ending Search
If you are a new trader who is just starting the endless search for your edge, or a trader who has already spent several years looking for your edge, you should stop doing so; markets change so quickly that an edge discovered today will likely be ineffective tomorrow. While the search for a trading edge might lead to quick profits in the short term, it is more likely to waste your time and cause you to lose opportunities and money.