I don’t either to be honest. Don’t kid yourself, it’s a very easy concept to discuss, understand, and really really want to perform, but really, it’s not natural. I guess this sounds ridiculous I know and people are probably throwing there collective mice at their screen and cussing me out. But it’s true. You, me, and every retail trader out there does not want to trade with an edge.
The questions are: what is edge; why is it important; why is it difficult; and how do we fix it.
First, what IS an edge?
It’s a competitive advantage. A way that you can operate that gives you the high ground in any fight. Or, a sustainable process that leads to increasingly better results. Pretty simple stuff right? In trading, it’s a bit more complicated. Most people believe their edge comes from their system. I used to believe this as well. I spent years… literally years trying to develop the “system” that gave me the edge. And while I believe I have made great progress in this, I will say that there is absolutely no way to gain your true and full edge from a system, especially if you use indicators to try to do it. None. (It’s cool, pick your mouse back up and throw it at me again. I can take it.) I define “edge” in my trading now as:
WHERE CAN I TAKE ON THE LEAST AMOUNT OF RISK
You know that your entry system consistently presents you with different risk reward metrics. The pip risk changes which changes the contract size, if you stick to a % risk management system. No matter how you do it, simply running a static entry system using any kind of indicator and even some of my price action systems will constantly move your risk around. That’s fine, it just makes a big fluctuation in returns if you have a string of high pip risk entries, you won’t make much money. It’s tough to deal with sometimes.
So, instead of always looking for the perfect entry system that works all the time, I started to view the chart in terms of this question: WHERE CAN I TAKE THE LEAST AMOUNT OF RISK? Seeing my trend? Good.
So that is an edge. Next we need to deal with why is an edge important.
Well, duh. Because without one we would do whatever we want. We need a structure as traders that no one will give us. In fact the whole industry is built around screwing with us and making us emotional and stealing from us. Sorry again… gosssshhhhh. We need an operating procedure. Not rules or algorithmic trading. I’m a discretionary guy all the way. I want the pressure of making the decision because I think I’m smarter than an algo. I may be more emotional but I’m smarter and can react. So I require a process and trading with an edge based around WHERE CAN I TAKE THE LEAST AMOUNT OF RISK makes the most sense to me. I am learning to train myself on my edge, like an athlete. I’m learning to visualize my edge. I’m learning to accept the weaknesses of the edge and focus on the strengths of the edge. I am learning to use it as a competitive advantage, not competitive perfection.
So what makes an edge difficult to trade? When I say we don’t actually want to trade with an edge, what do I mean? Simply, it doesn’t feel good to trade with a real, tight edge. It can be scary. We find some comfort in giving our trades “room to breath”. Why? If I’m wrong, I want to know exactly when and where and I want it to be as small as possible. Trading this way also allows for maximum value in terms of contract size so that if the trade works, it works well. But it doesn’t FEEL good. It’s hard to sell into that up move on a lower time frame that is meeting a great point on a higher time frame chart. It’s hard to TRUST. There it is. We need a bunch of proof before we trust. I won’t get into that here but trusing what you know to be true is the hardest thing we can do sometimes.
Finally, how do we fix it? Well, it’s not easy that’s for sure. But I know without a doubt that it’s the difference between an amateur and a career trading professional. Finding that edge, where you CAN TAKE THE LEAST AMOUNT OF RISK. I’m starting to feel like I’m repeating myself but whatever…
Here are my tips:
- Find a real edge. Don’t stop until you do. It may take a serious amount of time but that’s ok, because once you actually find it, you can use it for the rest of your life to trade with so invest in it.
- Train yourself on that edge. Eat, sleep, visualize that edge. I think about mine at all times of the day. I visualize myself taking those trades. I am internalizing my process every chance I get.
- Practice your edge. Not with a demo, but with small trade sizes. We need live practice. Athletes don’t practice against air all the time. They play against players that aren’t game speed but close to it.
- Love and Submit to your edge. You have to actually like your edge. You have to believe it works. You have to believe you are capable of executing that edge. And then finally you have to submit and just execute. You can’t deviate off course.
I’m in the thick of making this all manifest in my trading life. My progress over the last year has been unbelievable really. I am a whole different trader now than 6 or 12 months ago. I love this transformation. I wouldn’t trade it for anything. This investment will pay more than any other I could make.
So in closing, I would like to finish with one last thought that I have yet to express to you today…
FIND AN EDGE THAT ALLOWS YOU TO TAKE THE LEAST AMOUNT OF RISK…
Ok maybe I already said that.