7 Ways To Trade With An Edge:
“If you diversify, control your risk, & go with the trend, it just has to work.” -Larry Hite.
You hear of trading with an edge, but how do you know for sure you have an edge? How do do know that the odds are in your favor, & that the more you trade, the more your account will grow? Are you the casino & not the gambler, or is your winning the result of luck?
1. One edge is in trading entry points in chart patterns that historically play out as a winning trade more times than a losing trade. Even taking entries that play out as bigger winners than losers will give you an edge. The key is to do your homework & know how to manage the trades risk/reward ratio. Each entry from chart patterns is a trade in the path of least resistance. Cups with Handles, candlestick patterns, & triangles are just some patterns.
2. Another edge is in the use of historical price action backtesting. Using software, historical price data, and technical indicators, a trader can see how a system would have done over an extended period of time across multiple markets. Moving averages and breakouts in different time-frames are used to measure the equity curve in a system. This is the realm of the mechanical system trader. Price history gives the edge. Programming knowledge required.
3. Another edge is to trade a method that has been proven historically as a winning one. The method should have rules on what to buy based on fundamental or technical criteria , when to buy, how much to risk per trade, when to exit at a loss or when to exit to lock in profits. One example of such a method is trend following while the method is very robust it’s more of a long-term trading method looking for the huge wins in either direction, up or down.
4. Technical Analysis applied correctly can give a trader an edge. By trading what the chart is saying with support, resistance, trend lines and volume it will give a trader an edge over someone who enters randomly or based on opinions. The core of technical analysis is quantifying risk levels and profit targets.
5. Experienced discretionary traders can be their own edge through intuition which is developed through market experience and exposure to market behavior and what makes and loses money over many years of trading. Successful discretionary traders are like seasoned athletes who began to just know what to do in different circumstances based on past experience and learning through repetitive action. They are also like professional poker players that can instantly size up the odds of their hand and the possible actions of their competitors.
6. An emotional edge can be gained by traders who make buy and sell signals based on systems and methods instead of fear and greed, they can step in and buy in a bear market when a reversal begins with a new trend upwards with out being clouded by fear and they can allow winners to run in a bull market not selling to soon out of fear of giving back profits. Traders not affected by their ego can sell quickly when they are wrong to avoid taking a bigger loss than is necessary. Much of trading is a mind game and do not underestimate the edge of having the discipline to follow your trading plan instead of your own fear and greed over taking you during market hours.
7. Asymmetric risk edge is really THE edge that produces profits in the long term. The only way to make money in the long term is to have all your winners be bigger than all your losers. This can only happen by cutting losers short & letting winners run or having a very big win percentage. A good rule is to only take trades that can profit $300 for every $100 at risk. Only risk $1,000 if you believe you can make $3,000 on a specific trade. Of course a day trader with a 60% win rate may be able to get by with a $200 profit for a $100 risk if they stay disciplined in cutting losses & a trend follower may have amazing returns with a 30% win rate if wins are 5 to 10 times risk.
“If you diversify, control your risk, & go with the trend, it just has to work.” -Larry Hite.
You hear of trading with an edge, but how do you know for sure you have an edge? How do do know that the odds are in your favor, & that the more you trade, the more your account will grow? Are you the casino & not the gambler, or is your winning the result of luck?
1. One edge is in trading entry points in chart patterns that historically play out as a winning trade more times than a losing trade. Even taking entries that play out as bigger winners than losers will give you an edge. The key is to do your homework & know how to manage the trades risk/reward ratio. Each entry from chart patterns is a trade in the path of least resistance. Cups with Handles, candlestick patterns, & triangles are just some patterns.
2. Another edge is in the use of historical price action backtesting. Using software, historical price data, and technical indicators, a trader can see how a system would have done over an extended period of time across multiple markets. Moving averages and breakouts in different time-frames are used to measure the equity curve in a system. This is the realm of the mechanical system trader. Price history gives the edge. Programming knowledge required.
3. Another edge is to trade a method that has been proven historically as a winning one. The method should have rules on what to buy based on fundamental or technical criteria , when to buy, how much to risk per trade, when to exit at a loss or when to exit to lock in profits. One example of such a method is trend following while the method is very robust it’s more of a long-term trading method looking for the huge wins in either direction, up or down.
4. Technical Analysis applied correctly can give a trader an edge. By trading what the chart is saying with support, resistance, trend lines and volume it will give a trader an edge over someone who enters randomly or based on opinions. The core of technical analysis is quantifying risk levels and profit targets.
5. Experienced discretionary traders can be their own edge through intuition which is developed through market experience and exposure to market behavior and what makes and loses money over many years of trading. Successful discretionary traders are like seasoned athletes who began to just know what to do in different circumstances based on past experience and learning through repetitive action. They are also like professional poker players that can instantly size up the odds of their hand and the possible actions of their competitors.
6. An emotional edge can be gained by traders who make buy and sell signals based on systems and methods instead of fear and greed, they can step in and buy in a bear market when a reversal begins with a new trend upwards with out being clouded by fear and they can allow winners to run in a bull market not selling to soon out of fear of giving back profits. Traders not affected by their ego can sell quickly when they are wrong to avoid taking a bigger loss than is necessary. Much of trading is a mind game and do not underestimate the edge of having the discipline to follow your trading plan instead of your own fear and greed over taking you during market hours.
7. Asymmetric risk edge is really THE edge that produces profits in the long term. The only way to make money in the long term is to have all your winners be bigger than all your losers. This can only happen by cutting losers short & letting winners run or having a very big win percentage. A good rule is to only take trades that can profit $300 for every $100 at risk. Only risk $1,000 if you believe you can make $3,000 on a specific trade. Of course a day trader with a 60% win rate may be able to get by with a $200 profit for a $100 risk if they stay disciplined in cutting losses & a trend follower may have amazing returns with a 30% win rate if wins are 5 to 10 times risk.