How to Get and Develop a Trading Edge Successfully

trading edge

Millions of people start their trading career every year. However, only a handful of them make it in the industry. There are several reasons why only a handful group of traders succeed in the industry.

First, they take time to learn, develop a strategy, and backtest it. Second, they remain disciplined when implementing their strategies. Finally, they are always ready to improve their trading plans. All this is known as a trading edge.

Trading edge is an important concept in the financial market that explains why some traders succeed while most of them fail. In this article, we will explain what trading edge is and how to develop it.

What is a trading edge?

Trading edge refers to a trading approach or method that helps a trader make money in all market conditions even when other participants are in the loss-making territory.

This edge can take several factors. Some traders develop an edge because of their overall trading strategy while others develop it based on their risk management approach.

Some traders develop it through psychological factors and persistency. For example, Jim Simmons, the founder of Rennaisance Technologies has become a successful trader because of his reliance on complex mathematical algorithms. As such, he is able to make money in all market conditions.

Investing edge is also related with trading edge. The only difference is that it involves people who buy and hold assets for a long time. For example, it is clear to say that Warren Buffett has has an edge of buying holding quality stocks for years.

Do you really need a trading edge?

This is a commonly-asked question and the answer is to the affirmative. For you to become a successful trader, you need to develop a unique set of skill to analyze assets and implement trades. Your chances of achieving significant success without an edge will be limited.

For example, some traders have achieved success by using the scalping technique. Here, they buy and sell assets within a short period of time with a small amount of profit. Others, on the other hand, have achieved a trading edge by using the swing trading strategy while others have made a fortune using a quantitative approach.

Therefore, having a trading edge will go a long way in helping you become a better trader. If you are a beginner, we recommend that you spend a lot of time developing that edge in a demo account.

In the next few sections, we will help you to find and define your trading edge.

Interest and learning about trading

The first thing you need to do when finding your trading edge is having an interest in the industry.

Indeed, this is the main reason why most traders fail. They see an ad or are introduced to the industry and then they start trading without figuring out whether the market interests them. If you are not interested in the market or finance, you have minimal chances of succeeding.

However having interest by itself is not enough.

Multiple ways to learn the basics

In fact, most people who fail in the market have a lot of interest in it. Instead, you should take the longer route of taking time to learn about the market. Fortunately, there are many books, online videos (we strongly recommend that you follow Market Wisdom and Live Trading), and courses that can help you start the trading journey.

In these books, you will learn about the different types of financial assets such as stocks, currencies, and ETFs. You will also learn the various approaches to fundamental and technical analysis.

Also, you will learn about other specialised trading approaches like finding trading imbalances, using level 2 in trading, and how to read the tapes.

Observing your best wins

While having a trading edge is a good thing, the reality is that most people, even experienced traders don’t know exactly about it. However, if you have experience in the trading industry, you can easily define your trading edge.

Analyze your Trading Journal

First, you can look at your best wins. For example, you can look at your past trades in a quarter and try to identify a pattern. This is why having a good trading journal is very important. The journal will show you all trades you have entered, the reasons why you initiated them, and the time of the day you initiated and closed them, among other parameters.

Study the parameters

Second, try and analyse these parameters. As you do this, you could see that most of your wins were in technology stocks while most of your losers were in penny stocks.

If you are a currencies trader, you could see that most of your winners are in the currency majors while most of your losses were in crosses. Also, you could find that most of your winning trades were initiated during the morning sessions.

Therefore, your winning strategies will be your trading edge.

Test your trading edge. Again

Finally, test your trading edge over another period. This is where you try to apply the approaches that you have tried and tested and see whether they are working.

Final thoughts

A trading edge is an excellent concept that even the most experienced traders don’t know that they need. If you are a new trader, we suggest that you spend a few months using a demo account to try and find your sweet spot (our TMS is the perfect choice).

As you do this, you should try and see what works and what does not. For example, you can try combining scalping and swing trading strategies. If you make more money in scalping, this is your edge.

External Useful Resources

  • The Vital Importance Of Defining Your Trading Edge (IYR) – Investopedia
  • What is an example of a trading edge? – Quora
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