Find Your Trading Edge

Yet another good list from Swing Trader Alan Farley:

Farley notes the truism that "the market is a tough place to earn a living. The majority of profits go to a minority of traders. Members of this elite group utilize a definable trading edge at all times. In essence, this advantage is a point of view, scheme or plan of attack that separates them from the crowd."

That statement, as obvious as it is, seems to difficult for many people to empotionally grasp. Markets are a zero sum game; You are either  a) one of the outperforming traders, or 2) The guy thats paying them.

Farley lists "10 tasks you need to accomplish to find your trading edge. Not sure if you have a definable trading edge? If you have to ask, you don’t have one.

Here’s the 10:


1. Build on your own observations. Catalogue the moves that catch your attention and deconstruct them. How did they begin, and how did they interact with the chart patterns? Have you seen this type of move before? What kept you out of the trade the last time it happened? Small discoveries are the key to building a sustainable trading edge.

2. Walk the path alone. It doesn’t matter what other traders think, believe or act upon. Avoid the chat rooms and stock boards at all costs. Start figuring things out for yourself.

3. Keep it simple. Many traders look for a trading edge through complex mechanical systems. But it makes more sense to stick with the basics so you understand exactly why the last trade worked or failed. Over time, this self-analysis will evolve into unique rules, filters and tactics that match your trading style and skills.

4. Take personal responsibility. You have a big problem if you’re blaming Alan Greenspan, bad software and market makers for your continued failure. Accept the playing field as it stands, then figure out how to prosper from it.

5. Play the "what if" game. Scan the environment looking for clues to anything that might compromise your positions. You can avoid the majority of disasters by taking the first warning signs and moving back to the sidelines.

6. Prepare for change. Traders who think they have an edge may have none at all, or one that won’t stand the test of time.

7. Choose technology wisely.  Adequate tools foster a minor edge over those less prepared for the market day. Technology won’t turn a bad trader into a good one.
[But lousy tech will lose good traders money   -BLR].

8. Be an aggressive manager. Your full-time efforts must be devoted to increasing your profits on good trades and reducing your losses on bad ones.

9. Use both sides of your brain. A definable edge requires a mental process that feels like intuition. Profitability grows when we act spontaneously after internalizing prior trading experiences.

10. Think globally; act locally. Entry and exit rules define profitability better than any other technique. Those who focus ruthlessly on the tape are more interested in making money than being right.

10 Ways to Find Your Trading Edge
Alan Farley, 2/17/2005 12:00 PM EST

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