Finding Your Trading Edge

What is trading edge and how do you know if you’ve got one?

Well, I thought I’d ask Chat GPT that question and see what AI thinks…

And it came up with a bunch of examples:

• Statistical Edge – A backtested strategy that has been proven to work over time.
• Information Edge – Access to better information or analysis, quicker news, legally obtained insider information.
• Technical Edge – Using technical analysis to help predict price movements and patterns.
• Risk Management Edge – Implementing superior risk management, stop losses, and position sizing.
• Psychological Edge – Being disciplined to stick to a well-defined trading plan.
• Execution Edge – Having better trade execution capabilities, or lower transaction costs.
• Fundamental Edge – Using fundamental analysis to find undervalued or overvalued assets.

So, as retail traders, we can’t really compete with an information edge, execution edge, or a fundamental edge.

There are some exceptions but for most of us, it’s not going to be worth focusing on.

That leaves us with:

1. Statistical
2. Technical
3. Risk Management
4. Psychological

Unintentionally we’ve created the perfect formula for a trader’s edge…

Statistical

We need to know the pattern we are trading has a history of success right?

That doesn’t necessarily mean years of hardcore backtesting with code. It could be general market observations, recent themes or patterns you’ve observed with your own eyes.

Technical

Most traders can do TA. Draw some key levels, and analyse a market.

Edge comes from combining that with context.

Understanding what’s relevant, and what’s not.

A bull flag after a catalyst into fresh highs vs the same pattern in the middle of a 3-day range the day before a holiday…they are not the same.

Risk Management

I don’t think you can gain much of an advantage over others here.

The ability to cut losers, run winners, and preserve your capital is a must, just to play the game at a competitive level.

Adding to positions, knowing when to press, and when to play defence is definitely an edge amplifier though.

Psychological

It’s the age-old thing… discipline matters.

Planning matters.

Emotional regulation matters.

It’s a must-have… none of those are optional.

So how can you find your edge?

Get to base camp first:

• Dial in your discipline
• Get a plan together
• Make sure you aren’t going on tilt
• Learn to manage your emotions when trading
• Understand supply vs demand and price action
• Come up with a simple position sizing and risk management strategy

Now build real edge from there…

1. Observe how the market behaves around key levels, key times, and unusual conditions.
2. Watch how supply v demand shifts
3. Mark up your charts
4. Print off pattern examples
5. Come up with strategy rules
6. Backtest manually or with data
7. Rinse and repeat until you have a pattern worth trading that you believe in…

Edge comes from YOU.

Your observations, your analysis, your ideas, and yep… your execution.

It’s ok to get a head start from others, and be pointed in the right direction to start looking.

But you have to believe in the edge and have total confidence in it to trade it correctly.

That’s why finding it yourself is crucial.

It doesn’t have to be revolutionary – you don’t need to reinvent the wheel.

Start with an observation and build from there.

In the book Pitbull by Marty Schwartz, he talks about a simple observation he made about how the S&P 500 reacted to the bond market.

It was super simple, nothing fancy, but he noticed it, and spent a weekend ‘backtesting’ it with eyeball.

He built a quick and simple trading strategy around the idea… and made $1.4 million in a month trading it.

I often think about that chapter…