Creator of Trading within the Zone, Mark Douglas, defines trading edge as “nothing greater than a sign of a better probability of 1 thing happening over one other.”
This market edge must be objective and quantifiable, which implies it’s backed by numbers and statistics.
You’re probably rolling your eyes and groaning “Ughh, math and spreadsheets!”
It ain’t an edge in the event you don’t know the probability of the outcomes!
You wouldn’t bet big in poker in the event you had absolutely no clue about the possibilities of your hand winning, would you?
To have a reliable idea of the probability of your trading strategy’s success under various market conditions, you would want to do some back testing over a looong time period.
And if the numbers aren’t showing any consistency or strong odds of winning, you’d likely need to regulate the indicator settings or entry and exit rules.
From there, you gotta run more sets of tests to see if there are any improvements.
Market Wizard, Mark Minervini, in his book Think and Trade Like a Champion writes:
By defining my parameters ahead of time, I establish a basis for knowing whether my plan is working or not. Have a process, any process, but have a process. Then you could have the premise from which to work, make adjustments, and ideal your process.
I do know, I do know… This implies lots of grunt work and would probably get boring. But in the event you put within the effort and time, it could really repay.
Other than creating your personal system rules and running tests, you can even opt to learn from a mentor or trading coach.
This isn’t a shortcut, though, since you need to do your research on whether or not their framework or strategy has been proven to work.
Besides, your goal ought to be to eventually trade independently as a substitute of counting on other people’s trade signals.
Journaling your market observations, let’s say, a response to a specific news release or price patterns that play out, can be a very good practice on the subject of fine-tuning your trading edge.
Knowing whether or not a setup has a high probability of winning could eliminate a fantastic deal of trading stress, even in the event you’re still facing market uncertainty.
Having a track record that shows consistency in the long term gives you the boldness to take trades that line up along with your system rules. More importantly, it also gives you some reassurance that the strategy can bounce back after a loss.
In turn, trusting your market edge prevents you from trading impulsively or taking revenge trades. It helps you stay disciplined in sticking to your strategy rules as a substitute of giving in to fear and greed.