Optimize Your Trading Edge
03/01/2008 12:00 am EST
An edge is usually defined as a method that gives you some sort of advantage over the competition. Although the term is used more widely in gambling circles than in trading, it is a common probability term, and a concept explored in Bo Yoder’s new book, Optimize Your Trading Edge. Whatever method or strategy anyone uses to find and execute trades, they use because they feel it gives them an “edge” against the competition. However, from Bo’s perspective finding an approach that gives you an edge is just the first step and from a statistical perspective maximizing this edge can make a dramatic difference in your profitability.
To get the most out of this book you can’t be afraid of numbers or tables of data as there are many throughout the book. The book begins with a basic introduction to probability before launching into what Bo calls the payout/payback cycle. This is an interesting way to approach the phenomenon that all traders have observed whether they have recognized it or not. That is after a series of winning trades (payout) the market shifts and you go through a series of losing trades (payback). Bo believes that “clear understanding of payout/payback cycle analysis and its management is critical to maintaining a consistent level of performance.” For clients he consults with he analyzes their trading data to determine the “keystone transition event” which is a “consistently repeated behavior/event that tends to precede a change in the clients payout/payback cycle.” Though Bo feels this is different for every trader, I would still have loved to see some examples to illustrate what he means.
The trading logs and numerous examples of account results are used to support Bo’s observations about trading. Several are quite surprising as he feels that traders often spend too much time attempting to increase their trading accuracy while the same amount of energy spent on increasing their risk/reward ratio would have a greater impact on their profits. Exercises are also provided where the reader analyzes the trading logs and answers a series of questions. After the first three chapters lay the foundation for determining the statistical probabilities of any trading system the middle chapters deal with myriad topics such as developing a business plan, exploiting your edge, stop placement, and the five top reasons that traders fail to capture the profits they should.
Also given are Bo’s views on how a typical trader develops and the fundamentals of his trading setup, several of which capitalize on the theory that the majority are always wrong. These take advantage of either the euphoria or capitulation of traders as both create situations where the majority is already positioned on the other side of the trade. Either situation creates a vacuum, and thus a trading edge. Managing stress is also discussed along with the importance of balance in a trader’s life. In addition, Chapter 11 features three tests that Bo feels a trader “must pass in order to become a long-term, profitable trader.” In his final chapter Bo concludes by advising “Run everything you read about trading through a filter of skepticism—this book emphatically included!” This honesty is refreshing, and I applaud Bo for including it and for sharing his astute observations about trading.
The last chapter, entitled “Hiring a Money Manager”, works on the premise that the reader has concluded that the money they “make trading isn’t worth the stress.” Although I can see the logic of this chapter’s inclusion, it still seems a bit out of place in this book. The sometimes-scattered organization of topics detracts from the book’s flow, creating a somewhat disjointed read. However, with all the worthwhile information included, this flaw is quite minor, and, overall, I benefited from reading this book.