How do you find your own trading edge?
Updated: Jan 10, 2022
Edge, you have seen it many times on this website. An edge simply means you have a trading approach with a positive expectancy over the long run. How you get that positive expectancy, that’s up to you. If you have been reading my blogs, you probably already know what an edge is, as I spoke about it before. However, it seems that it’s not clear for most people, hence this article.
In this article you will learn exactly what a trading edge is and how you can develop your trading edge. You will also get a sneak peek into our trading edge. As you know, we use mechanical trading and, in this blog, you will learn more about that.
Is there a best trading edge?
This is a question I often get asked, the answer is: yes, but it differs from person to person. The best trading edge is an edge that you understand, that has reliable data to back the edge up and that you can execute without making any emotional mistakes. That’s the best trading edge and that should be the goal of your journey: to develop your own trading edge.
So, an edge differs from person to person. Some people like a more discretionary approach and find their own edge that way. I like a more mechanical approach and that’s where my edge comes from. Where does your edge come from? If you don’t know that, you don’t have one.
Take some time to think about this. Really dive deep into your trading to figure out if you have an edge, what your edge is and what type of person you are.
How to find your personal trading edge?
You find your personal trading edge by realizing that trading is only about two things:
Knowing when the odds are in your favor
Trading only when the odds are in your favor and not making mistakes while doing so
This is a successful trading career; this is the goal. A lot of people make it way too complicated, but this is the true essence of trading. All the rest is extra. So, start by determining where you are right now. Do you know when the odds are in your favor? If not, work on that. Can you execute perfectly according to your rules, or do you also take trades that don’t have a positive expectancy? Do you make mistakes while executing your edge? Figure that out.
You find your trading edge, you find your best trading edge, by developing a method that you fully understand and that puts the odds in your favor. It can be any method you like: Elliot Waves, Wyckoff, ZigZag counting, Indicator based etc. Whatever it is, make sure it fits with your personality and that you fully understand it. Then, make rules about certain concepts and start testing them. See if there has been any edge in the past trading it. Most people skip this part, but let’s be real: if there hasn’t been any edge in the past, why would there all of a sudden be an edge now?
Start with learning different concepts and see if you like them. Stick with the concepts you like and understand. Ditch the ones that you don’t understand. You don’t need to know it all, you just need a few concepts. Most traders make the mistake of learning as much as possible, but you only need to master a few things to become profitable. Keep that in the back of your mind.
How to develop a trading edge?
Once you have figured out which concepts you like, it’s time to start building rules. Make them as clear as possible, so that you can test them. Testing is done through three stages:
Backtesting
Demo trading
Live trading
These are the stages, in order, that you need to follow. If you don’t follow this structure, you will lose money, which you don’t have to. Start by backtesting. You don’t know how? Recently CDFX Trading and the proprietary trading firm BluFX made a series about backtesting and building a strategy. Click here to view it. Here you will learn how you can build your own trading edge.
When testing, the aim should be to be as objective as possible and to find a trading edge that you can actually execute in the live markets. As soon as you have done your backtesting and you have some form of edge, it’s time to trade demo. See if you can still trade the same like you did when back testing. Are the results similar? If so, and if profitable, only then switch to going live. The demo stage should take around six months or so. You really want a big enough sample size. Fix any problems you face during this stage before going live. This way you save yourself money and develop your trading edge the right way.
Example of our mechanical trading edge
Now it’s time to give you a trading edge example. As you know, we use a mechanical approach. This means we are very structured and use black & white rules in order to enter a trade. No guesswork, no gut feeling, but rules and statistics. That’s our approach.
Below you will find a walkthrough of one of the trading setups we recently took. Click on the pictures to make the pictures larger and more clear.
The daily timeframe
What you see here is the daily chart of AUDUSD. The three candles marked in the yellow box is our mechanical trading setup. I won’t give you the rules, these are for our members only. The point is, this setup is 100% mechanical, which makes it easy to test and execute. According to our statistics, based on the past 8 years of data, if this setup occurs in this pair, there is a 59% chance of price traveling the same distance as the length of the last candle in the yellow box, before taking out the blue line (see the picture below). This gives us a long bias. This gives us structure.
The hourly timeframe
This is the hourly timeframe in the AUDUSD currency pair. To recap, according to our statistics there is a 59% chance of price hitting the upper green line, before breaking the blue line. I know this information when price is at that yellow cross.
As you can see on the hourly timeframe, price has formed a range, then made a false breakout to the downside (marked with the white line and the X) and price then quickly moved back into the range and broke out. This indicates absorption of liquidity below the range. People that were long usually have their stoplosses in that area. These got triggered and the liquidity that got freed up, has been absorbed by a bigger player that wants to be long. We follow that bigger player. That’s the basis of our trading strategy.
I entered a long at the red line, with a stop at the blue line and a target at the green line. This gives me a target at 1.25R, so the risk to reward ratio is 1:1.25 with a 59% chance of making this return. As you can see, the odds are higher than 50/50 and I make more when I win. This is a clear trading edge. This is our quantified edge. This is what we teach our clients during our 1-on-1 coaching.
If I keep taking this mechanical trade, without making mistakes, I will make money in the long run. That’s how we trade. If you remember the beginning in this article about identifying when the odds are in our favor and only trading when the odds are in our favor, this is the perfect example. We know when the odds are in our favor and know how to trade it, which resulted in a win.
If you want any chance at winning at this game, this is definitely the path you should try to take for yourself.
Time to develop your own trading edge
Now you know exactly what a trading edge is, it’s time to take action. In this article you have been given some actionable tips that you can immediately use to build your own forex trading edge. Start doing that now, learn from our way of trading that we described, ask yourself the questions I wrote down in this article and take action now.
Are you interested in our trading approach? Schedule a free call with us. Here you can find out if what we offer is something for you. Get started now, get your forex trading edge and book that free call.
PS: Do you want extra trading tips to become better? Click here.