The Comprehensive Edge
The Comprehensive Edge
Edge can sometimes be quite a loose term in trading. I like to think of my overall edge as being multi-faceted and comprising of every element I can utilize to outperform the average market participant. I believe there are six ways that you can gain a competitive advantage vs other market participants: Trade Design Edge, Preparation Edge, Mental Game Edge, Execution Edge, Lifestyle Edge, and Incremental Progress Edge. FuturesTrader71 can be heard citing edge as “the reason why you should get paid” in markets. I believe outperforming your peers across these six areas will create a stronger reason as to why you should get paid.
First, we should understand that an edge can only exist in an environment where outcome isn’t certain. A weighted coin may land on heads 70% of the time, but it will still land on tails sometimes. The edge is to select heads. However, if we flipped a double sided coin – there would be no edge, as the game has a known outcome that is clear to all participants. So, we must first recognize that by having an edge – we are fully committing to the idea that we will not win every time, our job is to tilt the odds as far into our favor as possible. As you read about each of the six edge categories, keep this concept in mind.
Trade Design Edge
Although this might be the most important aspect of edge in trading, we’ll spend less time here because it is quite straight forward. Trade Design consists of a few elements:
- A historical probability to construct our trade idea
- A methodology that helps us determine trend/direction, key levels, a stop location in line with our timeframe/context, and trigger points
- A favorable risk to reward structure
- A per-trade risk amount that provides us with the ability to afford many trade samples and a low risk of ruin.
Most traders focus huge portions of their attention on this area, and rightfully so as it is very important. However, most of us have the ability to construct a trade with edge, but many of us are lacking the ability to properly execute trades with edge over and over again, without error.
For every trader, pre-market prep will differ. It takes some time, patience, and experience to develop the “must know” items preceding your trade session each day. If you don’t have a preparation process dialed in already. I would suggest that you start with a very simple process and elaborate from there. The most important part is to come in and do the same thing every single morning. When you set a framework for your approach to markets and are consistent in that, you’ll become much faster at detecting changes in the characteristics of your particular market. Whether that be changes in trend, narrative, or market regime.
My process has become very simple. First, I catch up on the news, briefly check twitter, scan a few reports including the Convergent Pre-Market Summary, and make note of any scheduled news events that I need to be attentive of. Then I simply open my charts and draw my key levels onto the products I’m trading that day. If those levels inspire scenarios and trade ideas, I’ll screenshot my chart and write them up. If they don’t inspire ideas, then that is my first signal that I need to exercise additional patience at the open and let some of the session play out before forming a bias. I used to have a very long, detailed, perhaps even convoluted pre-market template – however, it wasn’t serving me, and was overly complex – resulting in me completing it less often than I should. Striking the right balance of noting the most valuable information, but not over complicating things, is an important detail to dial in as you gain experience.
Mental Game Edge
Your mental edge comprises of the work you do away from the desk. Whether that be meditation, visualization, or whatever your process is for getting yourself in an optimal state of mind. Your peers, on average, are not doing this with consistency. I’m not saying it’s necessary to have some drawn out 30-minute session, even just 5 minutes of silence to get you to a calm state will be effective. Remember when we talked about tilting the odds in your favor? We have a much better chance of doing that if we can exhibit more mental clarity and less impulsiveness compared to our competition.
There’s edge in hiring a therapist, there’s edge in meditation, visualization, even affirmations. The key is to find your weak areas and figure out what works best for you to mitigate them. Learn to forecast your errors, understand when they are likely to occur, and have a plan for what to do as soon as you notice a trigger event. Having situational awareness is key if you hope to control your impulses and execute with discipline. This technique of “error-forecasting” was brought to my attention by Jared Tendler, which he calls the process of Mapping Emotions. He discusses this technique and more in a webinar we did with him in 2021 that can be found here.
A final element of the Mental Game Edge is resilience. The trader who can be in a down-swing or trading slump and still come in each and every day, performing the same process over and over – will progress so much further than the trader who is on an emotional rollercoaster based on trade outcomes. The ability to come in and execute your plan while things are not going your way is a huge edge and something most market participants are struggling with, even at a professional level.
Next is Execution Edge. Can you trigger trades at the correct moment? Are you getting the right entries? Are you mitigating FOMO and revenge trading?
Remember that Trade Design you spent all that time working on? Back-testing, studying setups, tracking your stats in your journal, analyzing rotation sizes, setting the right targets and stops. The Edge you built there will be wildly blunted if you cannot bring yourself to execute that plan perfectly. Execution Edge is the ability to conduct error-free trading. A few years back, FuturesTrader71 did an Ask Me Anything Session that was dedicated fully to Trade Execution. That session discusses trade execution in much greater detail than I can cover in this post.
I was lucky enough to play college football with some very talented players. A friend of mine, Ricardo Allen (formerly a team captain for the Atlanta Falcons) gave me some very insightful feedback about success in sports at a professional level. He explained to me that at the NFL level – what separates the guys that are really having success from those who are not – is that the most successful guys are really living a professional lifestyle. They are treating their body right, they are studying the mental game, they are taking time to rest and recharge. They’re avoiding activities that are counteractive to their overall mission.
When you play at a level in which “everyone is good”, you really have to find the smaller edges to truly differentiate yourself. In trading, there is a lot of information available, and a lot of people who are very knowledgeable. So why are most traders unprofitable? If you lack discipline in your lifestyle, it is very difficult to consistently operate with discipline in the markets.
Incremental Progress Edge
I wanted to save this one for last because I believe this aspect is so critical to your success as a trader. Also, this category is certainly my biggest blunder as a trader. I’ve spent a lot of my trading career being results oriented and this creates a feeling of “I take 3 steps forward, and 2 steps back, then 4 steps forward, and 5 steps back” and so on. It’s seemingly random progress because I am rating my progress day-to-day based on something that has a random outcome. Remember that the whole concept of edge is to tilt the odds in your favor, it is not a guarantee of winning every session.
You need to stay in the game. A lot of traders build up this internal frustration over days, weeks, and months of this up and down emotional state. When you are spinning your wheels and feeling like you aren’t making any progress, especially if you’re experiencing stagnant or negative financial progress. It becomes easier and easier to start losing faith in your plan, deviating from that plan, and ultimately violating risk limits and introducing catastrophic errors.
Eventually, you are going to need time off either due to burnout, or worse, lack of capital. When you have to take time away because you’ve either depleted yourself – or your account – you are forced to stop gaining experience, while your competition is getting more and more reps. If you can stay in the game, you have a much greater chance of success by simply outlasting your competition and gaining more consistent and quality experience.
Instead of focusing on lofty financial goals (for which you will doubt your ability to achieve after every period of losses), focus on gaining one key lesson from markets each and every day. Reframe the notion that a “winning day” has to be a result of profitability, and transform that into the idea that a “winning day” is a result of learning about markets.
Hopefully, you’re coming to realize that your real competition in markets, is the previous version of yourself.
– Landau Lang (@CT-Jaguar, Support and Content Manager at Convergent Trading)
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