It is important to have an edge as a trader. But, what is an edge? And how do I act on it to minimize risk and profit consistently.
The generic definition of an edge is this: an edge is a higher likelihood of one outcome happening over a second outcome.
With this definition in mind, let’s take a look at a simple scenario that illustrates an edge.
If you play heads or tails, with a friend, with a coin that you know is weighted more on one side (heads by 70%) than the other (tails), does it make sense to try and predict whether the number of heads will exceed the number of tails by the end of the day?
No, because each outcome is not random, you know that over time if you keep calling heads you will be wrong more often than you are correct.
The exact same can be said about trading. Simply put, once you have found an edge, all you have to do is keep applying that edge to the market whenever it presents itself. Different traders hold different kinds of edges. The type of edge you hold matters little. What matters is that your edge is profitable and can be applied consistently. And, if you have multiple edges, that definitely matters!
There is no point in guessing whether the next trade is going to be a winner or a loser. Guessing is futile. Don’t guess your way into a soupline. When your edge is present, you don’t need to guess what the ruling market will do next.
So what is my edge? I have multiple edges since I prefer a good nights rest …and need my beauty sleep.
My #1 edge is Mindset –I know that money is a means and not an end. I know that markets rule 24 hours a day, non-stop. Missing a trade means nothing, losing a trade means little. I know there are many more trades that are correlated and time-lagged to any that I miss or lose.
My #2 edge is Money Management —the money management model I developed over the years minimizes risk and adapts to trader performance. When I take a loss, it is minor …gains always exceed losses. My model is based on the work of great minds like:
- Ed Thorpe
- Claude Shannon
- John Kelly, Jr.
At least one of those names should ring a bell. Afterall, Claude Shannon (M.I.T.) is the father of modern Information Theory!
My final edge is market analysis which I learned from taking the first two CFA exams; as well as learning entry & exit points according to price charts (technical analysis).
What is your edge?
When thou sittest to eate with a ruler, consider diligently what is before thee… –prov XXIII