Defining Your Trading Edge in Forex
07/16/2010 8:30 am EST
Since I started teaching students of Online Trading Academy, I have obviously taken a great interest in the development of their careers and progress along the way. I have taught a variety of individuals, hailing from different backgrounds and each with their very own reasons for taking on the tough challenge of seeking a life as a professional Forex trader. Some are just looking for a secondary or supplementary income, some are just looking for a new interest in life and others want to become completely self-sufficient from a consistent and profitable trading career. No matter the needs or ambitions of the trader, one should fully understand the real requirements for successful trading of any kind and that is all about developing an "edge." I have read many articles and listened to a number of students and traders alike and time over, I hear people talk about their edge in the market; however, I sometimes wonder myself if people know exactly what this edge really is that they love to talk about. Well, if you are confused about talk of the edge and would love to know more, then I guess today is your lucky day...welcome to the Sam Evans definition of the Trader's Edge.
In my opinion, the edge, as we like to call it, is made up of a number of key aspects that shape any trader or independent speculator's ability to profit from the movements of the financial markets. I would categorize these into the following areas:
1. Fundamental and technical analysis
2. A plan for trading
3. Risk management
By breaking these three areas down, I will share with you just how uncomplicated and methodical the edge can become.
Fundamental and Technical Analysis
As we all know, the forex market makes movements every day, and to some degree, these are predictable using either fundamental analysis, technical analysis, or a combination of both. In our attempt to generate returns from these sways in price, as traders, we employ some form of strategy based around repeatable events and a thorough understanding of the macroeconomic picture. The danger we all face in this quest for analytical superiority is in our basic human need to be right. In my experiences from my own trading and having worked with hundreds or traders through Online Trading Academy, I know that for most traders deciding on which tools to use for their methodology can be a daunting task, to say the least. You see, there is a literal multitude of different techniques available to traders via the mediums of books and the Internet. There is an inherent need for us to try out absolutely everything available to see what works and what does not.
My advice to anyone reading this article right now is to remember that everything works until it doesn't! What I mean is that any sound speculative strategy will have times of success and times of failure. By employing a particular system, the trader should recognize that the market itself is full of too many variables and these will result in failure of the technique as well. Simply put, we can only hope to incorporate a strategy which works around 50% of the time, and maybe as low as 30% on occasions. This is the random nature of human psychology and the market at work. However, it should be noted that this does not mean that we are doomed for failure. If a disciplined level of consistency is applied to the technique at all times, the results then become measurable, and from this, we can track performance over a sustained period of time. In fact, we then soon realize that the actual success rate of the system is by far not the most important aspect of consistent profits; rather it is how the trader wins and how they lose which makes the biggest difference in the long run. Keep your system for doing business simple and recordable. Dividends are the result of measurable consistency, not hit rates.
A Plan for Trading
Without some form of trading plan, the speculator has absolutely no edge whatsoever. Think of trading like any other business. No matter the area of expertise, the committed businessperson needs to work from some kind of framework and operating schedule, and professional trading is no different in any way. Each and every trade analysis and taken needs to be planned in advance. I always tell my students to make sure that before they place any kind of order in the markets, they first need to answer every question that could be asked of them once they are in a live position. Price movements, combined with emotions, can create a recipe for disaster and the worst thing anyone can do is to change the rules of the game halfway through. The professional trader needs to aspire to a level of pure, flawless planning and execution. This ties in with the strategy itself because if a consistent plan is adhered to when executing a particular trading method, then the trader can use this to gauge their ongoing performance to see what works over time and what does not. Entering a trade should never be carried out on a gut feeling or whim, but instead because of detailed, reasoned planning. Think about it like getting in your car and going for a drive. If you have no final destination, then how can you realistically hope to ever get anywhere?
When push comes to shove, risk management is probably the most vital piece of our trinity and completes the formation of any trader or speculator's edge in the marketplace. As I often say, trading success really boils down to the distinct ability to control losses and lose only small amounts in relation to the trader's account size. However, it is often misinterpreted that the placement of a stop loss order is the crux of capital preservation when there are far many more aspects of risk control that we need to be aware of. The market speculator needs to understand that the actual areas in which we take our trades are also a part of the process. There are high risk entries and low risk entries and depending on the individual's particular style of trading this can vary greatly. I personally approach my trading from a low risk, high probability and large potential reward perspective, which in turn allows me to not have to rely on a high hit rate of trade success, but instead gives me the breathing space to be wrong more often than right and still come out on top.
This is the approach I teach my students in the Online Trading Academy classroom as well as in the ongoing XLT live market webinar. I don't want to have to be jumping in and out of the market frequently as this can be costly on my spreads in Forex spot, and means that I wouldn't be selecting the very best trades on offer. When I am wrong, I get out, and when I am right, I allow the trade the necessary room to breathe and mature. With this is mind, I always make the preservation of capital my number one priority in trading at all times. Let's face it, with no money in the account, we have little room to actually place a trade.
In summary, these three areas are what come together to make up the trader's edge, and the beauty of this business is that if we respect all three and implement them into our overall approach to the markets, we still have room to input our own distinct marks and styles to create a plan which suits our personality and criteria. What I am trying to get at is that when it comes to defining your "edge," you should not assume that it is some mystical Holy Grail but instead, realize that it is created from the discipline, patience and planning which only the individual is in control of – in essence, the true trader's edge is the trader themselves.
Have a great weekend!
By Sam Evans, instructor, Online Trading Academy