A trader’s edge is what differentiates profitable traders from struggling traders. Every trader needs an edge in the market to succeed otherwise it is as random as flipping a coin to dictate your position. An edge must give you over 50% probability of success in an entry. Throughout this blog post, TRADEPRO is going to go through “how to develop your trading edge”. Realistically if you can identify a system that works and you manage risk, you will have created your edge.
There are many areas a trading edge can come from:
- Trading only specific assets
- Trading only specific hours
And all of these are vital. One of the biggest secrets to trading successfully in the market, regardless of what you are developing as an edge, is knowing HOW to be patient and WAIT for the opportunity, which comes from self-control & discipline. As well as knowing WHEN to be patient which comes from experience.
Developing an Edge from Strategies:
This is where a lot of traders start when they think “How can I develop a trading edge”. The strategy seems to be everything at the beginning, which is important if you want to understand what system you are trading and if it has the potential to win in the long term. Has it won in the past? Has it been back-tested? Understanding and reading charts are really important as well, however, this is step one of developing your edge.
Understanding what the system in play is, that’s the easier part, following that system and knowing how to wait for the opportunity is when a trader is disciplined. When to be patient comes from experience. This is a two-fold process. Without psychological discipline, the strategy doesn’t mean much. Therefore traders develop their mindset so that they are able to follow their strategy.
Within that strategy, there is an edge no doubt. For example, I only like to play market extremes, meaning where the volume may evaporate and we have a clear and easy path to the next distribution. What I like to call it is “we don’t fiddle in the middle”. This is common practice for traders, playing a range is where you would accumulate losses.
If I showed you the following two images which would you be more inclined to look at for opportunity? I would suggest looking at the image on the left, you have a trend, you have extended movement. The one on the right may look tamer, but you don’t know that until the end of the day.
Developing an Edge from Personality:
A person’s personality really comes out in the markets, when risk is evidently on the table. A person with a focused personality type will have an easier time being patient and waiting than someone who may lean towards the gambling trait. In essence, the more systematic the process the more of an edge you will develop even personality-wise. Unfortunately, emotions in the market have no place. In other walks of life, emotions are great, in the market, emotions are hunted by others. It’s vital for a person to understand their personality type and adjust the trading system accordingly, or change their personality type to the market. The latter is generally harder.
Some people find out they’re extremely mellow and level-headed, disciplined, and able to see the market as 1’s and 0’s. Being able to identify risk and flawlessly follow their plan, is the ideal archetype for a trader. Learning patience and discipline will mitigate these issues, if you can take a step back and STOP yourself from making impulsive decisions and trades in the heat of the moment you will see a clear image of what you should be doing. A disciplined trader will turn into an experienced trader.
Developing an Edge from trading specific Assets:
Not all assets are the same! They don’t trade the same and they don’t necessarily act the same. I like to identify a specific EDGE for individual assets that I trade. While trading one asset alone can be your entire edge! Rather than trading multiple assets at a time, and juggling assets, some traders are better waiting patiently for one to move.
For example, stocks require momentum and liquidity. As a stock trader, you are going to look for those larger swings in momentum and breakout moves. You will be very accustomed to technical analysis.
On the other hand, if you focus on options, you need to be aware that options price movement is different from that of stocks themselves. You have to be aware of expirations, the greeks and implied volatility, and how that may affect your price. So you would need to take the momentum principle to options from stocks and understand the theory of other variables affecting price. It is harder to trade options like you would stocks! So you need to develop a separate strategy edge.
Developing an Edge from trading specific Hours:
Trading certain days and certain hours is an edge in itself. There are specific assets that trade better during certain days and certain hours. The time zone that you are in also makes a difference. Here is a quick breakdown to help you understand the difference between different assets and timing.
- US market is the most liquid market, opens 9:30 AM EST. Closes 4:00 PM EST.
- Most volume is traded in the first 30 mins of the day for the MOST part.
- A lot of low FLOAT, small CAPS trade pre-market (heavily)
- After-hours trading starts at 4:00 AM EST and ends at 8:00 PM EST.
- Know when stocks have expected news and make sure you have access to a live news source.
- The heaviest traded options market in the world, and the most liquid is the US.
- The options market opens at 9:30 AM EST and closes at 4:00 PM EST. without AH trading.
- The biggest moves happen in the first 15 mins (for the most part) Meaning you should NOT get head faked by the first move of the day.
- Options don’t trade at a 1:1 movement with their stocks, they have multiple variables. Called the Greeks that influenced their price.
- If you day trade options you have to be aware of the expirations. A lot of traders do NOT trade Fridays because of pinning options movement and because options expire on Fridays.
- Options traders usually do not trade Quad Witch events for the reason above. Erratic moves.
- Futures trade NEARLY 24/7. They are closed ONLY 1 hour a day from 5:00 PM EST to 6:00 PM EST. Then they close at 5:00 PM EST on Friday and reopen at 6:00 PM EST on Sunday.
- Futures movement is slower outside of the US market hours.
- Futures volume usually comes in the heaviest in the first 30 mins of the market open and the last 30 mins of the US market close.
- Futures movement and gain and loss are solely based on the movement, rather than other external variables like the greeks.
- Trading during the quad witch is unfavorable for day traders as there is usually slow movement and pinning.
- News events can really alter the volatility of the futures market, it’s important to have a news source just in case something like that would happen.
- Futures markets have expiration dates as they too are derivatives, keep in mind when the futures expiration dates are.
Knowing these few tips can help you develop an edge, as you would know when to avoid certain trading times and when you jump into others.
Overall a trader’s edge is vital to succeed in trading, you need to have a system that is backtested and good trading psychology ultimately to succeed, and if you’ve ever asked yourself “How to develop your trading edge”? Then take these tips throughout this blog into consideration.
If you want to develop your edge further by improving your trading psychology, TRADEPRO Academy has a great psychology course available, check out it.
If you want to join with us in our live trading room, Check This Out.
The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.