Module 3: Having an Edge – What and How to Think About it

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LESSON: Having an Edge – What and How to Think About it

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[op_liveeditor_element data-style=””][text_block style=”style_1.png” align=”left” font_size=”16″ font_font=”Montserrat” font_color=”%237e7e7e”]As we now know the market creates random outcomes. If the market creates random outcomes how can we produce regular and consistent profits? The answer to this is having an edge in the market.

An edge in the market is something that gives you a statistical advantage of better than 50% win rate over a large sample size of trades. From now on when I say a “large sample size of trades” I mean a number of trades that is at least 20 or more.

Excluding the spread and holding costs traders should be able to at least average 50% win rate by simply flipping a coin and going long or short accordingly. To create an edge that is better than 50% win rate we need have some sort of method or system.

Some traders use all types of indicators and black box systems to try and create this edge but if you are reading this I trust you are a Price Action trader. Price Action will be your edge in the market. The Price Action trader’s edge is recognisable patterns in the market that tend to repeat themselves.

Now you understand that the market creates random outcomes, and you have identified your edge, now you need to start thinking in the correct manner. The correct method to start thinking about your trading is to start thinking in probabilities.

Thinking in Probabilities

Traders never know what trade will win and they never know what trade will lose. They can know however, that over a large sample size of trades that they will be profitable if they have a proven edge. If you begin to think like this, losses will begin to affect you less. You will realise although you lost this trade at the end of the month or year you will be profitable. You will also be less likely to risk too much money on any one trade because you will know that any trade at any time can do anything.

The next change you need to make in your thinking is around individual trades. Traders tend to get caught up in the trade they are in, or in the trade they just won or lost. These do not matter. What does matter is the sample size of trades.

Your edge can not play out in one trade. Your edge needs a number of trades to take effect and time to play out to give full effect. Think of it this way if I was to flip a coin, I should over a large sample size of flips average 50% heads and 50% tails.

Even though this is the case I still may flip 10 heads or tails in a row. This doesn’t mean that I am not averaging a 50% flip ratio, it just means I have not had a large enough sample size of flips to start averaging 50%. This is the same with your trading. Each trade does not matter, but what does matter is what happens after a large sample size of trades.[/text_block][/op_liveeditor_element]