There are as many definitions of an edge as there are traders.
- An edge exists where the odds are in my favour that someone in the market will come in and act in a way that will make my trade work – Mark Douglas;
- A trading edge is a technique, observation or approach that creates a cash advantage over other market players – Investopedia;
- An edge is a statistical advantage;
- A higher probability of one thing happening over another;
- An edge is that trading strategy that determines which traders are successful and which fail;
- An edge is a competitive advantage
- An edge distinguishes trading from gambling.
An edge can be anything that consistently gives you an advantage over traders on the other side of your trades (the market).
Examples of a trading edge
- Trading in the direction of the trend;
- Trading from support and resistance levels;
- Using candle stick patterns that show a preponderance to repeat as tested in back-testing;
- Buy on retrace when the trend is up;
- Sell on retrace when the trend is down;
- Any trading strategy that shows a historical success rate, probably constitutes an edge as long as there are traders in the market that just want to make money, without putting in the effort needed. And we know, as long as there are people selling strategies and software, that group will keep growing.
- An edge does not implicate a 100% success rate. It doesn’t even mean you will make money (that is a function of risk). It only means you will have a positive result over a series of trades.
Read Brett Steenbarger’s view on What constitutes an edge.
My thinking: if only 2% of traders in the market are consistently profitable, your aim should be to get out of the 98% family. Because that is where the traders without an edge live.
How do you know you have an edge?
- If you profit target (TP) on a trade is higher than your stop-loss (SL) you have a potential edge;
- If you had some training in trading, you probably have an edge over traders who did not have any training;
- If you are a student that prefers to collect your own info and teach yourself by researching and trial and error, you probably have an edge over someone that just enters the trading arena without learning and with emotion;
- If you are using a trading strategy (I prefer ‘strategy’ over ‘system’ because ‘system’ creates the impression that it is infallible, while ‘strategy’ includes success and failure), but, in any case, if you use a trading strategy that gives you more winning than losing pips, you probably have an edge.
- If you have back tested your strategy over a statistical significant number of trades, and it reflects a positive outcome, your strategy probably has an edge.
Interesting perspective on the size of an edge and its effect on trading results, by Dr Steenbarger.