Having a trading edge is absolutely essential for success no matter what market you are thinking about trading in. Without an edge, you will not have any real concept of how you should place trades or go about tracking the results you are getting from your trading efforts.

In this Wiki, we will discuss having an edge in your trading, what a trading edge is, real-world stories of what not to do, cautionary notes, system chasing and unrealistic expectations of what having an edge means.

Having an Edge in your Trading

Having a trading edge is absolutely essential for success no matter what market you are thinking about trading in. Without an edge, you will not have any real concept of how you should place trades or go about tracking the results you are getting from your trading efforts.

How do you know when it’s a good time to get into a trade? Where should you take your profits? When should you close your trade at a loss to preserve your precious trading capital? What time of the day should you trade or not trade? How much capital should you risk per trade? What is the maximum drawdown in your account will you tolerate per day or per month?

Those are just a few simple questions to ask yourself when referring to your trading edge. But make no mistake about it; if you can’t answer at least those few questions then you should never put your hard-earned money at risk in the markets, period. If you do then you are simply doing nothing more than mindless gambling which makes it more than likely that you will lose your money sooner rather than later.

Let's take a look at what an edge in trading actually is.

What is an Edge?

Simply put, your trading edge is nothing more than a method for entering and exiting the market. Obviously, you want this edge to show an overall profit after a sustained period of time placing trades in a live market situation.

Contrary to popular belief, your edge is not something that has to win a 70, 80, or even 90 percent of the time. This kind of belief is very faulty thinking and can be damaging it can be on the psychology of new traders because it forces them to think in terms of unrealistic expectations. We discuss unrealistic expectations later in this Wiki. But make no mistake about it, unrealistic expectations are one of the major causes for new traders never making it to long term profitability.

If you are one of those people who think that you are going to have a 100% win rate and turn $100 into 1 million please try and bring your unrealistic expectations back down to earth. If you can trade a small account like a professional, have excellent risk management, and make something like 2-5% per month then you will open up a lot of opportunities to manage money for other people that have plenty of money to invest. You can also go the route of online prop trading which has exploded in popularity over the past few years. If you can generate 2-5% monthly, investors are frothing for this kind of high return because it is exceptional compared to what they might get in more traditional investments. Their other option is to get a couple of percent in bonds per year or take higher risks in stocks.

Many traders make it a personal mission to find some sort of trading system or strategy that never loses. Sorry to burst the bubbles of anyone that thinks it’s possible to find a strategy that never loses but it’s impossible. It’s also rather foolish to think you can outdo the brightest minds in the financial world who have PhDs in mathematics. If it were actually possible to find a strategy that never loses then that strategy would be taking on so much risk that it would literally be hovering on the brink of financial ruin second by second. If this sounds like you then we would strongly suggest that you re-examine your goals and make a more realistic plan to achieve your them.

We will touch more on this stuff in a moment but first, let us give you a real example of how disastrous unrealistic and faulty thinking can be to real money in a live market situation.

A Real-World Story of what Not to do

For the purpose of this true story, we will let the trader who went through this experience speak in his own words.

So, back in 2009-2011, I was helping out a friend of mine with a start-up Forex brokerage firm that he was putting together. He asked if I wanted to come on board and help get it up and running and I decided to because I was allowed to continue my trading while at work and got to be part of an exciting start-up.

The firm was a boutique brokerage that catered to high-net-worth clients only. These are the kind of people that were massively successful in business and had a lot of money kicking around to trade with. So we are talking about smart, successful, and wealthy people exclusively.

I can’t tell you how many of these successful people used this one particular strategy thinking it would never lose and make them insane gains of 100-200% per month. Now before I tell you what the strategy is I want to be clear that I am by no means whatsoever suggesting that you engage in this kind of trading behaviour. I strongly advise never trying it because it’s a complete knucklehead waste of time strategy that is guaranteed to destroy your capital quickly.

Here is the strategy: These traders would pick one currency pair, usually the EURUSD because of the high liquidity. They would then go long and go short at the exact same time in the same currency pair, book a 3-5 pip profit on the trade that was in the direction that the currency pair was moving, and hold on to the losing trade. After they booked the first take profit they would then open a new long and new short at the same time in the same currency pair again. They would repeat the process of booking the profitable trades only and always hold the losing trades while never closing them at a loss. The thinking was that the currency pair would come back and they would be able to eventually close all the losing trades at a profit as well. Effectively they would only close a trade if it was in profit and continue to hold any open positions with a loss until such a time that the market came back to the losing trade’s price and move into profit. Only after the losing trade was in profit would they then close it.

What this type of trading does is increase the cash balance on the account when they book the little winning trades, but at the same time, it’s holding more and more open losses. What these traders failed to realize is that the economic value, or equity, of the account was going down and down until eventually they would get a margin call and we would have to liquidate or offset the massive number of losing trades to stop the client account balance from going into the negative. You see, it doesn’t matter if you have booked $10,000 in profits. If you are holding $9,999 in losses…..the value of your account is worth $1. But these traders didn’t seem to understand this basic truth.

As a shockingly true example, we had one trader who somehow managed to convince one of our wealthiest clients that he could make him 3% per day and never lose any money. He even guaranteed it in writing. He was managing this client account that started with $3 million USD. He was trading on the EURUSD pair in early 2011 when the EURUSD was on a massive 2,000+ pip bull rally over a few months. This trader used this strategy I described previously of only booking the profitable trades and holding the losing trades until the price came back to make the losing trades profitable.

So he was obviously booking a lot of long trades as profits but very few short trades were being closed because the EURUSD was in the middle of a massive and relentless bull rally. Within 3 days of this trader starting to trade the client’s money, the account was in margin call! He literally had hundreds and hundreds of losing short positions. 3 whole days and 3 million dollars were basically gone. But the client was seduced by the potential to make easy money despite the obviously terrible situation and deposited another $2 million USD to clear up the margin call. The trader resumed trading. A week after that fresh deposit the account was again in margin call for the exact same reasons as before. Once again the client deposited another $1.5 million USD even after being explained the real value of the account was close to nothing at that point. That’s a total of $6.5 million USD in deposits.

After a grand total of two weeks of trading the client finally threw in the towel and fired the trader managing the account. What the trader managed to do was bring the cash balance of the account up to $10 million USD which you would think is awesome for 2 weeks of work. 6.5 million to 10 million in two weeks seems pretty good. However, the major issue was that he was also holding hundreds and hundreds of open positions that amounted to $9,980,000 worth of unrealized losses!! This meant the account equity was literally $20,000 down from the $6.5 million in deposits. What we as the brokerdid was hedge all of his short trades with an equal position size on the long side which completely stopped the risk of any further losses in the account valuation. We had no choice.

This was absolutely unbelievable destruction of wealth and the worst part was that the trader was supposed to be paid on performance. This idiot actually believed he was going to win! I had never seen that kind of blatant stupidity before and it’s a highlight from my long time in the trading business for sure.

As an interesting side note, the EURUSD continued to rally another 800-900 pips over about a year before it finally went into a bear cycle from where the account was margined called for the last time. This meant that if the trader continued to do what he was doing the client would have had to deposit, roughly estimated, somewhere between $300-$400 million dollars more just to keep the account afloat. This would have bankrupted the client several times over.

If this doesn’t make sense to you why the trader would do something like this then I’m really happy for you. It’s a completely idiotic way to trade and you should never ever attempt to do anything remotely close to that in your personal trading.

Let’s get back to talking about your edge.

Your Trading Edge

There are many extremely successful traders that actually win 50% or even less out of all the trades they place in the markets. The key for these traders is that they are always winning more pips on the winning trades than the losses they have from their inevitable losing trades. We have seen traders that make over $1,000,000 US dollars per month with a win rate in the low 40% range. Yes, they have a lot of capital to make that amount of money but they also put in a couple of decades of hard work to get there.

Can you even imagine losing on more trades than you win and still coming out with a profit? I guess this is a good time to point out that losses are and always will be a part of professional trading, period. So if you are one of those traders that have a really hard time accepting losses then you need to get some intense training in the psychology of money management if you want to make it in this business. Don’t worry, we have a great Wiki that goes into great detail on the subject of Trading psychology HERE. There are also many great books written by some incredible people in the field of trading psychology.

Your edge is your trading plan which incorporates everything from the reasons you enter a trade, your entries, exits, trade management, risk management, etc. It should be rigid enough to keep you focussed in the short term but flexible over the long run to make adjustments when appropriate.

Your edge should be the easiest part of your trading. It’s easy to find and test a strategy that will work in the markets. However, you need to not fall into the trap of focusing too much on the system or complex trading methodologies. As a trader, you should put the most focus on the Reasons for entering a position rather than How you enter a position. Read that again. The reason for entering a trade is more important than how you enter a trade. For this reason, we think that understanding Fundamental Analysis and Sentiment Analysis is vital to a successful trading approach.

There are two major elements that move the markets which are extremely important that you incorporate them into your edge. These two elements are Fundamentals and Sentiment. Both of which we will cover at length in their respected Wikis. Just keep it top of mind that fundamentals and sentiment are the main drivers of price action in the Forex market.

A Cautionary Note

Try not to get too caught up in or overly invested in technical analysis. Professional institutional traders don’t focus heavily on technicals and they are the masters of the Forex universe. In our Wikis we don't focus heavily on technicals for two major reasons:

We highly doubt that these Wikis are the first piece of information you have come across on the subject of trading. The chances are very high that you have been surfing around the internet, maybe bought a course, read a couple books, or even attended a seminar on trading. If you have done any of that then you no doubt know plenty enough about technical analysis and don’t need us to further bore you with more of the same stuff you already know. Wehn it comes to trading, we would guess roughly 95% of the information out there on the internet is based on technical analysis. You’re probably here because you’ve realized that technicals are not enough to get you to your goal of being consistently profitable.
The second reason is that technical analysis is the least useful form of analysis available to Forex traders. This is in direct contrast to what most people have been taught but we have yet to have anyone prove us wrong. For true professional traders technical analysis is the smallest component of their trading edge. Most professional institutional traders trading edges only incorporates a tiny amount of technicals mostly as a timing tool.

Most so-called trading gurus only teach technical analysis and leave out the most important elements of trading. This is because technicals are sexy, easy and simple to sell. Technicals are very black and white; if this happens on a chart then you do this. Very simple to learn and execute.

The trading gurus simply don’t know how to trade with the fundamentals and Sentiment Analysis which are the real reasons why the market moves the way it moves. The markets do not move because a technical indicator or a squiggly line on a chart says it should move in a certain way. It is worth taking a look at our Wikis on Fundamental Analysis and Sentiment Analysis.

Could you imagine if George Soros or Warren Buffet came out and said that they need to wait for the stochastic oscillator to be oversold and in divergence with price action, but the Ichimoku cloud must be floating below the candles, and the 7-period exponential moving average must be crossed up over the 37 DMA? Everyone knows that these guys are a couple of the wealthiest traders in history and no one is delusional enough to think that this is how they trade. So the question to ponder is why do 95% or more of retail traders do the exact opposite of what the best traders in the world do?? Actually think about that question and really try and understand it.

From the perspective of an institutional style of Forex trading, technicals should only be used to refine your entries and exits and not relied on solely to make your trading decisions.

You should test your edge in live trading for a minimum of 50 trades to determine if it is worth trading or if it needs some tweaking. This will tell you how tradable your edge is. Wouldn't you rather be trading the real reasons why the market is moving and trade in line with the market sentiment rather than rolling the dice on some technical trading system that probably doesn’t make money over the long run? But hey, if you make money trading technicals then more power to you because it is possible. All we suggest is to try incorporating the fundamentals and sentiment and see if you can improve the overall outcome of your trading because it typically does.

Many technical systems will work in one type of market environment but will get crushed in others. For example, a simple breakout strategy will work far more often in a raging bull market than it will in a flat market where a breakout system will get chopped up. However, fundamentals and sentiment analysis will work in all market environments all of the time once you correctly know how to identify them. This will take some time and practice but the payoff is far greater.

Typically, when most traders start learning technical analysis what happens is the more they learn the more knowledge they gain. But it didn’t seem to matter how much knowledge they gain they never seem to improve. However, when they start learning fundamentals, the more knowledge they gain the more their actual trading improves. This is really interesting to think of, isn’t it?

Let’s now look at some problems traders have when trying to figure out an edge that will work for them.

Trader Problems when Creating an Edge

System Chasing

System chasing is one of the most common problems that new and retail traders suffer from without even realizing it. The main cause of system chasing stems from unrealistic expectations of what is possible in the markets. It seems really nice that a particular trading system says that it will make 100% per month and that you will be a millionaire overnight but the reality is that promises like that are all complete hogwash and you would be wise not to waste your money on things like this. Even if you do come across a system that genuinely does makes 100% per month, and there are definitely lots out there that come and go, it’s assured that this is being done by taking on massive risk and hovering on the brink of disaster on a moment to moment basis.

Anything that sounds too good to be true is either illegal or guaranteed to blow up your trading account at any moment. Do you really want to take the gamble and see if you can make your millions and get out before it blows up and takes all your money with it? The chance of it blowing up the moment your money hits the account is far greater than you making millions on a get rich quick scheme.

The Process of System Chasing:

You start out by researching and finding a trading system that you like. Monday morning you sit at your computer and fire up your trading platform ready to take on the world. Maybe you have some winners and maybe you don’t. Sometime around Wednesday or Thursday you completely lose your confidence in the system because of all the losses and realize that the results are nothing like what was promised. This is usually a combination of you not trading the system correctly or the system itself is not any good. By Friday you quit trading altogether, ditch the system, and go out for a few beers to cool off and recharge.

Then comes Saturday morning, you are not at work, you have some free time, and then that itch to make millions hits you again. Staring at your credit card statement and realizing that you spent way too much money on beers and chicken wings so you then get back on the internet and search out the latest and greatest trading system or strategy. You find what looks amazing and promises the moon for a low one-time payment of only $99. So you slap it on your credit card and start learning all about this new system. Monday morning you show up at your computer all fired up and ready to stake your claim.

This process repeats endlessly until you realize that trading is a mugs game or you simply cannot financially go on in this way anymore.

You see, what the trader is doing is trying to find a method that does not ever lose, which of course is not possible. We have shown examples of this already. Losses are and always will be a part of the trading business. The reality of trading is that losses should not only be expected in every single system or edge but you should embrace them because every loss is a down payment on your next win if you choose to learn the lesson the loss has to teach you. Losses are an unfortunate part of our business but professional traders accept losses as normal events and move on.

Overcoming System Chasing

If a trader is to overcome system chasing it’s very important to change their views on losses. Don’t try to avoid losses because you absolutely can’t do that no matter how hard you try. Instead, plan on how you can trade around losses and intelligently manage them so that you preserve your precious trading capital. Keep your risk small on each trade and minimize drawdowns through intelligent Risk Management. If you find yourself unable to manage your risks intelligently then it might be a good idea to start looking into some serious training on trader psychology. We have a great Wiki on Trading psychology HERE.

If you have made 100 trades or more you will no doubt have seen strings of losses and runs of winners. This will help you to know what to expect from your edge in the future. This in turn makes you less inclined to endlessly chase after new and better systems. Gaining that experience over the 50-100 trades will give you great ideas on how to perfect your edge and increase its profitability over time rather than running into the arms of the next latest and greatest system.

Measuring the success of your edge over something like 50-100 or more trades is a much better approach than losing your confidence after just a few losing trades. If you are going to stick around in the trading world you can never measure your success or failure with a small number of trades.

If you have taken over 100 trades and you are losing money like crazy then it’s your job to figure out why. Here are some things that you should look at to determine the culprit of your trading losses. Remember to be completely honest with yourself because lying to protect your ego has no place in profitable trading and will only derail you from achieving your goals.

Here are some questions to ask yourself that might help you overcome system chasing:

Are you trading the system EXACTLY the way it was intended to be traded? If not, why?
Are you getting into trades too late which is causing the reward-to-risk ratio to go down?
Are you getting out of your trades because you fear losing money?
Are you not getting out of trades because you fear losing money?
Do you simply lack the confidence or conviction to trade the plan the way it was designed?
Did the trading system promise you the moon and now after a few trades you feel that you have been sold a lie?

Notice how all of these questions are based on psychology. If you are trading the system perfectly and you have had honest proper trading psychology then it’s now time to start questioning whether the trading system simply doesn’t work. There are many many ways to make money trading Forex but for every one profitable edge, there are many many strategies that will do nothing but lose your money and destroy your ability to ever have confidence in trading.

One solution for system chasing is to properly learn how to incorporate fundamentals and sentiment into your trading you will see measurable results over the long run because you are actually trading the real reasons that the market is moving in the first place rather than staring at price charts for some sort of signal.

You will need to build a strong conviction with your edge in order to be successful. But the unfortunate reality is that most traders do not want to hear is that conviction will only come with practice and experience which will take some time practicing the correct methodologies.

One way to get over system chasing is to trade and communicate with like-minded traders. If you can be part of a group or community of traders that are all trading the same way you will find it much easier to be focussed on your trading edge. Bouncing ideas off people who are trying to trade in a similar style as you can have an accelerated learning effect because you get to hear things that you may not have thought of on your own.

Having a mentor is even a better option if you can afford it because he or she can help keep you accountable with a little bit of forced discipline. Plus it’s always easier to have conviction in a system if you are seeing positive results from your mentor or peers. Admittedly, finding an authentic mentor is difficult.

Your edge’s success is built on how much conviction you have with your trading. The only way to gain real conviction is to test and practice a method until you are confident in achieving an overall profit. This takes time but this time and experience are what separate the traders that will be here for years to come from the traders that are the statistics of the past.

Unrealistic Expectations

Unrealistic expectations are the root cause of almost all trading related psychological issues. We would even go as far as to say that unrealistic expectations can have a major negative impact on your finances, relationships, and overall quality of life. There are just way too many easy ways for people to get stuck with an unrealistic mindset. This could be from the personification of a wealthy lifestyle on reality television, to the many internet marketers showing flashy cars, houses and beautiful women on Instagram and other social media apps. People see so much of this crap that they start to believe that is the only way to have success or happiness in life. So it's no wonder newer traders bring unrealistic expectations into the financial markets. They have literally been plastered with unreality all day long.

Trading is a business and should be treated as you would any other business, NOT as a get rich quick scheme. But unfortunately, too many new traders come to this business because they have heard stories about other traders making millions overnight with no effort. If that were true then they obviously missed the part of the story where the trader gave back all those millions the next day and went bankrupt because of the inappropriate amount of risk he or she was taking. To put a more positive spin on it, they probably missed the part of the story that talks about the years of hard work and dedication it took to become a millionaire trader. That is the reality that most traders never try or want to face, trading is hard work and it takes time to become great at it.

Others have been sold a pipe dream of easy riches by some so-called trading guru that has probably never made any money in the markets other than from the products he has sold to unknowing hopeful traders. But it’s hard to lay blame people for buying these products because human nature naturally wants everything as fast as possible including the accumulation of wealth. These internet marketing pirates with their terrible trading products are just meeting the natural demand that the marketplace is asking for. But the reality is that nothing worth having comes easy and that absolutely includes becoming a successful and profitable trader.

All traders at some point will need to realize the value of becoming a consistent trader if they are to survive for the long haul. Your trading business will need time to gain experience with different market environments while consistently utilizing the best concepts available.

At this point, it is worth pointing out a major wrong way of thinking that most traders suffer from. Your personal account size has absolutely no bearing on your future earning potential in the Forex world. Said another way, don’t let the fact that you may have a small amount of money in your trading account stop you from trading like a true professional. Do not get stuck in the trap of thinking that you need to have millions of dollars at your disposal in order to make money and succeed.

If you can make a professional and consistent 2%-4% a month on a $1,000 account with low drawdowns then you are a Forex trading god and you don’t even know it. We often hear traders say that they would never take a trade that risked 50% of their account if their account was large but they have no issue taking that kind of risk on an account that only has a few hundred dollars in it. Why do you think that is? This is the exact opposite way that you should be thinking about trading so let us explain why.

As a trader, when is your money most at risk of harm? The answer is when you have the least amount of trading skills and knowledge of how to control your risks professionally. So this leads us to the next question. When do you have the least amount of skill and confidence in controlling your risks? We hope that this is an obvious question for you. The answer is of course when you are a new trader with very limited experience. Even if you are a seasoned trader but you are like most other traders who say that they are about “Break Even”, which actually means you are losing money, you still should be taking the least amount of risk possible.

Risk is not always necessarily how much money or what percentage of your account you risk on each trade. Risk can be viewed as the amount of skill and good quality trading experience a trader has as well. Until you have gained a great amount of experience trading in a professional manner you are in fact dangerous to capital. This is not to say that you are reckless but it does mean that “newer traders don’t know what they don’t know” and that lack of knowledge is what is actually risky.

Keep your risks low throughout your entire career and you will naturally start to see larger sums of money come in if you go out and find yourself some money to manage. For example, you might decide to take your professional track record and go the route of managing high net-worth client funds or maybe you have a wealthy uncle who loves you and is willing to invest in your success. In some jurisdictions, you will need a license to do this and in many others, you will not. If you will need a license and don’t have the capital to get it then you can still take your track record to a proprietary trading firm or maybe to some of the many hedge funds and investment houses that might be willing to take a chance on you. These kinds of places are always looking for true trading talent and if you have a professional and verifiable track record then you are lightyears ahead of your competition even if the account balance is small. You could potentially be managing many millions worth of capital within a couple of years even though you started trading on a small trading account. There are no shortcuts to success in the Forex trading business; you have to do things the right way if you are to make a career of it.

Forget about setting profit targets and focus on the process of trading your trading plan consistently over the long run. Whatever system you choose you will have losing days, weeks, or maybe even a month. This is just the facts of trading but you need to realize that having a bad streak is not a reflection of your trading abilities as a trader but rather just some bad luck if you have been sticking to your edge that has proven to be effective. The only expectation that you should have with your trading is to trade your plan consistently like a boss.

Conclusion

Your edge’s success is built on how much conviction you have with your trading and the only way to gain that conviction is to test and practice a method until you are confident in achieving an overall profit. This takes time but this time and experience are what separate the traders that will be here for years to come from the traders that will be the statistics of the past. You don’t want to spend all kinds of time and money only to become one of the many statistics so real in your expectations and start trading like a professional.

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