What is a trading edge? How to get a trading edge for success in trading ?

What is a trading edge? How to get a trading edge for success in trading ?

A trading edge is defined as a set of conditions which result in a net gain when used over a large number of trades.

Let us think of a casino. The gambler can win once , or can win many times. But, if he gambles for a long period of time, he is going to lose money because the Casino receives Rs 100 and pays out Rs 97. The Casino has an edge. In the long run, the edge will show itself resulting in a guaranteed loss for the gambler.

In trading, nothing is guaranteed. Yet, traders must have some idea that the trading strategies they use will have more gains than losses over a long period of time. That is the trading edge.

No single trade will provide you with information on your edge. A series of trades may be profitable or losing purely by chance. When you take a statistically significant number of trades then the trading edge should come in play.

If you have made just five trades in the  Nifty and all of them were profitable then that is probably by chance - a random event.

Suppose you trade a 100 times in the Nifty futures over one year. Now, 100 is a significant number of trades. If you make money after an year, then you probably have an edge.

All trading should start with an edge.

In the next post, we will examine how we can determine if we have an edge in trading. 

HOW DO YOU KNOW YOU HAVE A TRADING EDGE ?

HOW DO YOU KNOW YOU HAVE A TRADING EDGE ?

1. Your trading edge should be confirmed by statistical analysis.
This way is the easiest to apply and the most difficult to create. If you have a statistical analysis of your trades then you know for sure if you have an edge. Suppose you have recorded the details of actual trades taken over a period of three years. There are five hundred trades and you have the reasons for taking each trade, together with the the gain or loss  per trade. Putting this data into Excel can give you a complete statistical analysis of your performance. If you are making more money than you lose, with a reasonable upward sloping equity curve, then you have an edge.
But that was the easy part. The difficult part is to have actually kept a record of your trades. Suppose you did not keep a record. Then what do you do? Then we come to the other methods.

2. Back-Testing a mechanical trading system.  
You may be trading with a mechanical trading system - a method that has a set of rules and these rules have been tested on past data. If your trading rules can be tested over previous / past data, then do so. The results of the back test with give you some idea if you have an edge or not. If the performance over the data period is satisfactory then at least you have an edge in the past.

3. Be consistent.
if you are not using a clear set of rules which can be back tested, then this one is for you. You should be consistent with your trading method. Follow the same set of rules for all your trades. Chances are that your consistency will ensure that you have an edge.