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If you can find a trading edge, you can become a successful trader. Or so the story goes...

But it's not that easy. If it was, everyone would be rich, duh.

(Yes, I know it couldn't actually work like that)

I've been around markets for long enough to notice a definite pattern.
The majority of new traders come for the 'easy' money. Some will realise early on that it's not actually easy and drop out.

Others have early success through some combination of luck & the kind of insane risk tolerance that only ignorance of risks can nurture, and/or they're right place/right time. The proverbial genius in a bull market.

Ask them to define or explain their edge, and the conversation will go something like this... πŸ‘‡

What is an 'edge' anyway?

This is where the conversation usually goes off the rails. Everyone's got their own version and explanation for what constitutes 'edge'.

Here's mine.

Edge isn't real.

Not in the way it's usually thought of at least πŸ‘‡

This is a big problem. The idea that an edge is something to be found, or an achievement to unlock is just plain wrong. This isn't like the movies where the hero sets out on a journey to find the precious edge that once unearthed, will grant the holder a licence to print infinite money until the ends of time.

Maybe this is a marketing problem. Everyone starts out looking for the easy money. Sometimes the market gives it to them. There's always some survivorship bias in play with newer traders, and they make for the best stories.

The ones who got f***ed on their first try are hard to find (and nobody wants to listen to them).

Those who do well from the start make it seem easy. They're buying support, selling resistance and making money. It can look like they have an edge.

The market usually humbles them one day. That day might be a long time coming, but it always seems to arrive. Once the dust settles, they realise they never had an edge at all, and will either bow out of the game altogether, or go looking for answers... πŸ‘‡

"If I can just understand the economic data releases, I'll know what's going on and make better trading decisions"
There Are No Answers: Stop Looking
What’s going to happen next? What does this mean for stocks? Spoiler Alert! Nobody β€˜knows’

While this is useful... Where's the edge?

"I'll gather statistics and model the markets I trade, see how they move and then I'll know what's going to happen next!"

Also useful, but where's the edge? And you'll never know what's going to happen next, especially not from a bunch of historical data.

Which historical data do you pay most attention to? Here's a weekly chart of Nat Gas futures πŸ‘‡

Sure, the price always reverts to the mean in the end but will the trader still be solvent if they bet on that at the wrong time...?

Markets change constantly. Volatility bounces around. Different drivers, narratives, themes and regimes take turns in the spotlight. πŸ‘‡

Front and Backloading Themes
The initial logic of mortgages collapsing, interest rate + principal payments plus loss of job still holds true. Does it not?

Something as simple as a change in trading hours can screw up a mechanical, stat-based strategy. It's a fragile approach.

So, if 'edge' isn't real, what are we doing here?

You'll kick yourself for not figuring this out sooner. It's so obvious!

Buying cheap and selling expensive.

That's the game. Yep. Simple, but far from easy.

Hopefully you're reading this like "Thanks Captain Obvious" but it needs to be said.

I'm staggered by the number of people who don't think about value, preferring to obsess over obscure stuff like how far price digs into a 'demand zone' on 'average' before turning.

If your approach (trading business) doesn't have concepts of value (plural, think about it) at the core... NGMI.

Defining value is harder than it sounds πŸ‘‡

It’s completely subjective! Value is an opinion, it’s ephemeral and useless. It changes constantly based on who you ask, and there’s no oracle of truth!
Small Brain: What is Value?
β€œValue” in my mind is one of the most ambiguous and useless words in the English language. It’s also one of the most interesting.

The closest thing we have to a value truth oracle is the 'free market', where prices are determined by the collective opinion of market participants.

And any profitable trading business or strategy is derived from that value principle, with the sole intention of...

  • Buying things that are too cheap
  • Selling things that are too expensive

How a trader chooses to define those parameters, the timeframe they're making that judgement on, and how they subsequently enter and exit advantageous trades is their personal 'edge'.

In other words, the edge is the individual. The creator of the process, system or strategies that can generate positive expectancy.

All of those old clichΓ©s about trade management, position sizing and avoiding risk of ruin are valid.

But HOW do we create an approach to incorporate all of this?

Infuriating as this is, it's personal and it takes time. Everyone's tolerances are different. And there has to be some level of optimisation and preference to suit the individual (otherwise the approach isn't viable, because it won't be consistently executed).

For me, entering a trade that goes nowhere for a few days is torture, and anything that puts me on tilt leads to a greater likelihood that I'll do something stupid. So, I won't do it...

...Unless I recognise in advance that it's a trade that might not go anywhere (expectations matter), butdecide the advantageous price is worth the hassle factor.

There's no right answer other than... "it depends".

For example, every new trader is 'taught' from the outset to use a stop loss to avoid the risk of ruin. But is that the right approach for everyone, especially as they gain market experience?

Take a look at the replies to this tweet. πŸ‘‡

More than one answer boils down to... "paying attention".

I'm sure that wasn't in this book πŸ‘‡

But the point stands. And not just about risk management. Paying attention (especially to the macro picture) is fundamental to understanding the markets' incessant quest to find value.

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