Trading Edge
In the present time, trading edge is getting all the hype in the financial market. Many financial influencers and mentors talk about the edge. But only a few actually understand its true meaning.
No doubt, finding an edge in forex trading is crucial. However, before that, having a clear understanding of its concept is a must. In order to help you out, in this blog, we will discuss edge meaning in trading with examples and the process for developing it.
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An edge can be defined as an approach, methodology or tool that refines your strategy in such a way that ultimately increases your winning rate.
Having an edge is not necessary for trading, but for making a good profit, it’s a must.
- Get impeccable market knowledge
- Identify your way to trade
- Give priority to backtesting
- Work on your risk appetite
- Have the right psychology
- Keep the scope of improvement
- Determine your trading edge
Edge Ratio = Average Gain Per Trade/ Average Loss Per Trade
You can calculate the authenticity by dividing profit per trade by loss per trade. An edge ratio of below one is considered poor, while above one is considered good for traders.
A trading strategy is a road map or blueprint that deals with when, what, where, how, and why. Meanwhile, an edge acts like an USP for a trader. Under this, traders improvise the style considering the strengths.
What is a trading edge?
An edge can be defined as an approach, methodology or tool that refines your strategy in such a way that ultimately increases your winning rate.
Every trader has a different edge that is developed considering the fundamental, technical, psychological, and many other factors. It helps them to stand out in the crowd and achieve more profit than losses.
Traders with an edge can consistently
make money in the market even when others are failing. Although having an edge is not necessary for trading, it’s a must for making a good profit.
Trading Edge Example
The concept of edge is quite complex to understand. Thus, let us look at some examples to get a clear picture:
Suppose a day trader trades EUR/USD. The person has been trading in the currency market for a while and is well-informed about the pair.
The traders have identified a time frame in which the pair saw strong movement in a day and traded during that particular period based on some set of rules. Now, that can be seen as an edge.
Let us take another example, suppose a trader understands the impacts of news on currency pairs well. So the person keeps an eye on specific news and data releases.
And stay prepared to take a position as soon as the news releases. In this case, the traders have already planned the trade while the others just know basic information and will plan it after the release.
How to develop forex trading edge
If you want to develop a trading edge strategy, we are here to help you. Follow the below steps and build a solid edge that can pave your way to profitability:
Get impeccable market knowledge
Learning is the most important step regardless of trading with edge or without edge. However, when you want to develop learning the basics of the market is not enough.
Developing an edge means building a system that will help you stay profitable even in the worst market conditions. And it will happen only when you know what others don’t know.
In this stage, with bookish or basic knowledge, identify the hidden market aspects. Select your specific trading instruments and get an in-depth understanding of them.
Analyze how it reacts to different technical, sentimental, and fundamental events. Further, learn to use advanced tools, robot advisors, and trading systems to enhance your trade.
Identify your way to trade
Generally, traders select a strategy like day trading, scalping, swing, position trading, or any other and start trading in the market. However, that’s not the way. Once you have selected the trading strategy, you need to set your own criteria.
For example, not all day traders follow the same plan; they have different approaches. So, at this stage, identify your specific pairs, time frame, number of trades, news or patterns to trade, risk, analysis methods, and other parameters.
Give priority to trading edge backtesting
Backtesting is the key pillar for building a solid market edge. Once you have developed your plan, it’s time to test its authenticity.
A trader can backtest a strategy in many ways. First, open a demo account, place a number of trades, and analyze the wins and losses. Second, numerous automated backtesting software is available for free; you can seek the help of these tools.
And finally, you can backtest your strategy in a live account. Real accounts mean real market conditions and real profit or loss. So, start with small capital and backtest your trade effectively.
Work on your risk appetite
Many people feel that trading profit depends on luck. However, the fact is that it depends on how effectively you manage market risk.
Risk-taking is essential for making money in the financial market. However, it doesn’t mean you will take aggressive risks. If you want to survive in the market for a long time, then managing your risk is necessary.
In this step, try different risk-to-reward ratios, set risk per trade, identify risk percentage, and embrace position sizing to limit losses. Also, leverage can significantly impact and enhance your risk. So avoid trading with highly unrealistic leverages and test a variety of ratios for effective results.
Have the right psychology
For some traders, psychology is the real edge. Your mindset and how you control emotions are crucial in trading. Your way of dealing with unfavorable market conditions can make you different from other traders.
Most experienced traders fail to keep their trades unaffected by emotions. Many traders change their strategy frequently, place highly risky trades, blow trading accounts, and make the worst decisions just because of emotions.
Patience, discipline, consistency, rule-following, continuous learning and improvement are the components of building a psychological edge. Analyze how your emotions impact the trade and work on it.
Keep the scope of improvement
A trading edge cannot be permanent. Some are effective for a short period, while some are for a long period. However, how will you determine when your edge stopped producing results?
Thus, you need to keep track of all your trades for that purpose. You can seek the help of a trading journal. Prepare a journal, collect trade data, and regularly analyze it. Further, identify mistakes and optimize your edge accordingly.
Determine your trading edge
Many traders claim to have a trading edge, but the reality is different. However, you can calculate your edge with the below-mentioned formula and find out its effectiveness:
Edge Ratio = Average Gain Per Trade/ Average Loss Per Trade
Average Gain per Trade = Total Profit/Total winning trade.
Average Loss per Trade = Total Loss/ Total Losing Trade
Suppose the average gain per trade is $10, and the loss per trade is $6. So, the expectancy will be 1.6. So, we can say that your edge is giving you decent results. An edge ratio of below one is considered low, while above one is considered high for traders. Also, calculate your edge ratio periodically so that you can work on it whenever your edge expectancy shows a decrease.
Trading Edge vs Trading Strategy: What’s the Difference
Many traders confuse trading edge with strategy and think that having a strategy means having an edge. However, these two forex terminologies are very different.
A strategy is a road map or blueprint that deals with when, what, where, how, and why. It defines the way to buy or sell a financial asset to achieve the desired profit. A plan can guide you at every stage of your trading journey. And almost every trader has a plan.
Meanwhile, an edge acts like a USP for a trader. Under this, traders improvise their style, considering their strengths, and trade under the market conditions that best suit them. They do this so that their profit is always greater than their loss. An edge trader gets better results than a trader without an edge. Generally, professional and advanced traders have an edge.
Bottom Line
Trading edge comes from experience, knowledge, and understanding. Build your edge by considering risk, psychology, analysis, time frame, profit expectancy, and trading instruments.
Also, once you feel you have an edge test, find out the edge ratio and analyze whether it’s working for you or not. Further, continuous analysis and improvement are necessary for consistent profitability.