All Great Traders Have an Edge—Do You?

11/30/2011 2:00 pm EST

Focus: STRATEGIES

Derek Frey

Chief Market Strategist, Carnac Investment Advisors, LLC

Trader Derek Frey discusses how traders can develop an "edge" that they use to pull profits from the markets on a consistent basis.

You may have heard that you need to have an “edge” in your trading to really do this well and successfully over a long period of time. Our guest today is Derek Frey to talk about what “edge” is and how it works. So, Derek, why do I need to have an edge in trading?

OK, well Jack Schwager, New Market Wizards and New Market Wizards II, on page 191 of the second book, he was asked, “Now that you’ve had this one-person-in-the-world experience of being able to go out and interview the greatest traders over the last 20 years, what’s the number one thing you got out of it?

He said, basically, that if you don’t know what your edge is, you don’t have one.

It was simply that all the different traders they interviewed had a different edge. It wasn’t that they all used the same thing in any way, shape, or form. It was simply that they had an edge that was verified. It wasn’t something that they conjured or hoped, it was something invented by hopefully thousands of other people that have come before them. 

For me, the Gartley pattern has been around since 1935, so it’s been vetted by thousands and thousands of much smarter traders than I’ll ever be. They did my homework for me. 

So, having an edge—and it doesn’t necessarily matter what the edge is—but knowing that you actually have an edge is key. I do Webinars all the time, and I talk to traders every day, and they’ll come to me and they’ll say, “I’m in the euro, what shall I do? What do you think?” 

My question for them is, “Well, why did you get in in the first place? What was your edge?” They just look at me and out of a hundred traders I ask, maybe three of them can actually answer what’s the edge. Like, what are you doing? Do you really know that you have a solid angle here that you can do over and over again with some kind of probability and some kind of risk/reward. Almost none of them do. 

I think the statistics of how many people win and lose in this market and how many people know what edge they have, I know those are highly correlated. 

Alright, so the next question then becomes how do I find my edge? You found Gartley. Is it trial and error, or what do I do to find my edge?

You don’t have to reinvent the wheel. I didn’t invent the Gartley patterns. There are lots of tried-and-true proven methods out there. Part of these conventions is sharing the methods that have worked for us, those of us that are presenters. 

So, find something that fits your personality; that is the number one thing, because you have to, whatever it is, be able to repeat it. You’re not going to repeat something that you’re not comfortable with and that doesn’t fit your personality over and over again. 

If you’re afraid of heights, you’re not going to ride elevators. So, you need to find something that fits you, that’s comfortable for you, and that has some mathematical validity behind it. That’s the real key.

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