Have A Calculated Edge

Do you have a calculated edge?

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.

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Do you have a clearly defined edge?

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

Confluence

Preparations are key.

Preparations

Would you cast off the lines before checking for foul weather?  How about leaving port without a radio check?  Ever been at sea without a storm anchor?  Would you enter the harbor without checking the tide?   Only if you’re an Oscar.

To navigate the sea of emotion and fear in the markets, you must be able to asses the waves, weather and readiness of the ship.  All in conjunction with one another.

Some refer to this as “stacking confluence:”

  • Market Condition:  check charts, avoid indecision and choppy waters.
  • Market Phase: enter when the tide pulls back.
  • S/R: go long from support lines & short off resistance lines.
  • Indicators: If you use a compass,  understand its underlying principle.  
  • Price Patterns: Look for one of the primary price patterns.
  • Candlestick Patterns: keep an eye out for deceleration in price.

Any less than four given factors and I tie-off to starboard, sails down.

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Underway

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Thank you for visiting my web log.  Although this blog is centered around alternative investments, foreign currency exchange & risk managment,  you will not see graphs nor price charts scattered about.  You will not see any news summaries, news articles or other such rehashed fear & confusion.  I have spent an immense amount of time, energy and sleepless nights (i.e. life) studying charts, analyzing price movement, spotting trends, memorizing formulas, determining correlations and pouring over grueling finance books.  What for? For why? Well, to decipher the code, navigate the matrix and predict the future, of course.

That is passed.

This blog reflects process.  And right now, the process is refined, the models are in place and the Mind is set.  God is in the Winds.  And when the Winds gust, the simple truth is that either your sails are up or your sails are down.  Make preparations before the storm.  Here, I will tell you when I hoist the Mainsail, why I lower it, or if I’m just reducing sail to prevent taking on too much risk.

In the sidebar, you will only find links to those resources that I personally use or have personally contributed to.  If the quality or status of the resource has diminished, the link will be promptly removed.

Good sailors know the ocean is unforgiving, relentless and beautiful; they always signal other ships when a storm is coming and when the coast is clear, so that is what I will do for you  …there is enough of God’s blue ocean for everyone to enjoy.

 

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