What is a market edge, how do I find them, and how do I turn them into a viable strategy?

Simply put, a market edge is a technique or process that when repeated leaves you with profit above other traders, when allowed to play out over a reliable sample size.

An edge can come in many forms and does not have to be elaborate; Although these aren’t actionable strategies, patience is somewhat of an edge, as is confidence. The ability to execute a plan with unwavering perseverance is somewhat of an edge, as is having an indifference towards money. These defining characteristics allow a trader to progress beyond most other traders and achieve better than average results which over time, compound exponentially.

An edge also doesn’t have to be complex; Something as basic as [and this is a fictitious example] realising that over a very large sample size, every time you execute long when a 14-period RSI reaches an oversold reading of 15 on a H4 chart with a -1R stop and a +2R target, across 100 trades you come away profitable.

But, make sure you’re looking in the right places; Although simplicity can be extremely profitable, you’ll rarely find an edge by utilising a common indicator.

Let’s strip things back for a second and zoom out; A brokerage platform is a business and your broker aims to take your money, plain and simple. Why on earth would they provide advantages to you, the retail trader, to profit regularly and take money from them?

They don’t provide tools like the RSI, the MACD or the Williams% for example to aid you and there’s a reason why your average broker doesn’t supply you with market profile, a footprint chart, the volume weighted average price and so on, and that is because they’d love for you to trade using the same old indicators as every other struggling trader and in my opinion, they provide them to you to keep you busy losing money and going around in circles.

As Zach Hurwitz says in his Chat With Traders interview – “Retail indicators are designed to make new traders feel better. They’re there to help them feel like they know what they’re doing.”

But, to add balance to my above statement, many traders do of course use indicators such as the RSI and the MACD and profit using them, but it’s always useful to bare the above in mind.

So, how do you discover edges?

I discover edges by looking into and testing many, many different occurrences that I notice within the markets whether based on varying timeframe levels, open prices, close prices, contract rollovers, methodologies I’ve read of in books or online, or a combination of one or two of these things, and so on.

At one point I was having a coffee with a trader who mentioned that he’d noticed certain currency pairs rose towards the end of the week. This spiked my interest and, me being me, I spent the following few weeks looking into this, literally spending hours each day building spreadsheets on occurrences, the time that certain things took place, relative MAE and MFE calculations, asking what would the outcome be if I executed at ‘x’ time of day as opposed to ‘y’ time of day, what if I only aimed for a +1R target, what if I only aimed for a +2R target and so on, to see if I was able to capitalise on any potentially reoccurring happenings.

This is my process, I pay attention and simply investigate everything and anything. When I’ve collated data on a potential edge, if the setup or occurrence seems to be taking place regularly I test these with varying parameters [As mentioned above] and try to apply rules and in turn build a strategy. I then re-run the strategy to build a win-rate and to see if it provides profit across a reliable sample size. If it does, I have a profitable edge on my hands and, I begin trading it.

Unfortunately the aforementioned currency price rise wasn’t conclusive [In my investigation at least], but similar testing has led me to find extremely profitable edges [i.e. The $DAX and $GBPUSD edges I currently trade regularly].

Edges don’t have to be complex but they do have to be statistically proven to result in profit in order to provide the confidence needed to execute across a large sample size of trades. For example, I could explain one of my edges, but without showing you the data, the win-rate, the expectancy, the most profitable R-target to utilise etc, if you were to then execute the edge and you happened to begin trading at the start of a 3, 4 or 5 trade losing run I expect your conclusion would be that the edge doesn’t work, when in fact, had you traded the strategy with consistency and let the edge play out across a valid sample size, this would have resulted in profit.

When you repeatedly follow a proven process you experience satisfaction. Repetition builds self-trust and psychological capital which leads to confidence, and in the end, profit.

Following on from the above, an edge also has to fit your personality. If your edge is mechanical i.e. you execute, place a stop and a target and walk away, if this process leaves you anxious you’ll be lead to emotion and when this takes hold it will impact your decisions and you may find yourself checking the chart, closing trades early or making adjustments that aren’t part of your plan, rules or strategy therefore sabotaging your edge and in turn your results.

How can you know whether your current strategy provides an edge? If you have a concise and statistically-proven strategy in place and you’ve followed this with precision over a reliable sample size of trades [Ideally a minimum of 100 trades], in most cases you will come away with profit. If you don’t come away with profit, it may just be a case of fine-tuning your process and your next step would be to look back over the data gathered across your sample size [And again, you must have followed your plan with precision, or the data won’t be accurate and thus your edge is indeterminable] zeroing in on perhaps your MAE or MFE, your target and/or stop distance/s or your entries perhaps. A couple of small adjustments that allow you to take that extra R or those few extra pips per month builds an edge that lasts a lifetime and dramatically increases profitability.

Analysing this data is something I specialise in and have regularly helped traders with. Many traders have approached me with a solid plan and a valid strategy, but poor results. All it’s taken is for me to either fine-tune their edge, strategy or process and they’ve gone on to profit from the markets they trade soon after.

I could write thousands of words on uncovering, testing and building strategies around occurrences in the markets to generate an edge as it’s something I’m incredibly passionate about, but for now I’ll leave it there.

Thanks for reading and I hope you’ve taken value from the above.

If you’d like to know more, if you have any questions or if you’d like me to take a look at your data [Journal, trades taken, strategy or plan, etc] feel free to Email me. I’m always happy to chat.

…or if you’d like to join me in trading my strategies alongside me, click here.

  • Will.

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