Mark Douglas, the author well-known for “Trading in the Zone,” has an interesting take on trading edge. He describes it as “nothing more than an indication of a higher probability of one thing happening over another.” Essentially, it boils down to being a statistical advantage, a concept that might bring to mind images of sifting through endless data and crunching numbers.
I get it—who wants to dive into math and spreadsheets, right? But here’s the thing: without knowing your odds, there isn’t a true edge. It’s like jumping into a poker game and placing big bets without understanding the likelihood of your hand winning. Makes no sense, does it?
To gauge how your trading strategy might perform across different market situations, you need to conduct back testing. This involves a deep dive into historical data over a significant time frame. If the numbers don’t show consistent success or favorable outcomes, it might be time to tweak your indicators or adjust your entry and exit strategies. Then, it’s back to testing to see if those changes bear any fruit.
Mark Minervini, a respected figure in trading circles, emphasizes this approach in his book, “Think and Trade Like a Champion.” He says, “By defining my parameters ahead of time, I establish a basis for knowing whether my plan is working or not. Have a process, any process, but have a process. Then you have the basis from which to work, make adjustments, and perfect your process.”
Yes, it requires effort, and it can be tedious. However, the payoff from putting in this groundwork can be significant. Besides formulating your own rules and putting them to the test, you might also consider learning from a mentor or trading coach. Just remember, even with guidance, the responsibility lies on you to verify the effectiveness of their method. After all, the goal is to trade independently rather than rely on someone else’s signals.
A helpful habit is keeping a journal of your market observations, like how prices respond to certain news events or the way patterns unfold. This practice can sharpen your trading edge. Understanding whether a setup is likely to succeed helps reduce stress, offering some relief from the inevitable market uncertainties.
When your trading strategy has consistently shown results over time, it builds confidence. It emboldens you to make trades that align with your system’s parameters and offers reassurance that your approach can rebound from setbacks.
This trust in your market edge curbs impulsive decisions and revenge trading. It fortifies your discipline, encouraging adherence to your strategy rather than succumbing to fear or greed.
