May 162011

A discussion with another trade prompted me to think more about my edge.  Where is my edge? Many trades think the edge is in finding a “setup” that one can just trade over and over.  For years I looked for such a setup and didn’t find one.  I don’t believe such a thing exists.  Instead I think the edge is more inside of us.  Let me explain:

My edge is built on three parts:

  1. Understanding the context of the market
  2. Getting low risk entries at key levels
  3. Trade management


The first one has taken a long time to learn and I’m still learning as I go.  I remember when I first started learning about market profile and reading about day types.  They didn’t seem useful for me because you don’t know the day type until the end of the day.  But I remember reading that one develops the skill to envision the day type before the day is over.  I found that quite complicated at the time but now I think it’s very true.

I’m not at the point where I can see the day type in advance, but I am making progress towards this goal.  At my current point I am developing a sense for what the market is likely to do.  For example we drop lower and I am thinking “buyers could show up here and we could pullback and retest this level from the way down”.  I’m forming a hypothesis and then I trade that hypothesis.  I want the market to prove my hypthothesis wrong.

This is quite a bit different from saying “I’m going to get long at every CLVN or naked VPOC”.  That statement is not a hypothesis and it doesn’t take into account context.

Low risk entries

Notice I’m not saying “setup”.  I really dislike this “setup” concept and when people talk about their “setups” I loose interest quickly.  Maybe my trading is based on setups but if it is, it’s at a more subconscious level.  I know where I want to do business and I look to see how the market trades there.  That’s about it.  I’ve tried to categorize my trading into setups but I wasn’t able to do that very well.  I often would debate if a trade belonged to setup A or setup B (or both).  It made tracking setups really difficult in Excel.  I eventually gave up on it.

So what I’m saying here is I’m looking to trade at levels but other than that, there is a lot of discretion involved, especially with the context.  If the context isn’t there then I am not taking any trade.

Trade Management

This also takes into account context and adds in a feel for the market.  I’ve learned this slowly over time.  My biggest problem before was cutting winners short and letting losers ride.  Now I do the opposite.  Takes a lot of patience.  I used to average 2 ticks per contract and I was never happy with that.  This month I’m averaging 4 ticks.  That is a huge improvement.  Ironically, this improvement came without me even measuring or knowing my expectancy.  All I knew was it was positive and I was meeting my daily goal.  I just looked at the expectancy for the first time this month while writing this post.  My point here is that the expectancy comes from all three items.


So my edge is in all three of these combined.  It takes a long time to develop this and I think most of it is something that can’t be taught but rather has to be learned.

Here is an example trade from the Bund.  This is the only trade I took this morning:


This trade used all 3 elements (context, low risk entry, & trade management) to result in a nice trade.  +13 ticks, that’s 6.5 ticks per contract.

I think my second target is really interesting.  I had it a tick higher but half way through the trade (just before my first target was hit) I started having doubts and I fine-tuned it but lowering it one tick.  That turned out to have made a huge difference as the original target would not have been filled.  This is an example of how context & trade management made this trade.  Without it I probably would have ended up breakeven or with a small gain.

Some questions to ask yourself:

  • What’s your edge?  Do you have one?  Are you still looking for one?  If so are you making progress?
  • Are you combining context, low risk entry, & trade management for your edge?  Could any of these improve your edge?
  • Are you focusing only on entries and ignoring context?

If you like, feel free to share your answers.


  One Response to “Where is the edge?”

  1. Michael, this is one of the best blog posts I’ve read yet. I’m making my way back through your blog, and must say that this one really strikes a chord with me. I have long detested the words “system” and “setup” … everyone wants to find a “system” that works (the word “system” implies IMO something that can be bought or that anyone can read and follow), and everyone wants to have those great “setup”s, which imply something that can be traded in isolation, without considering the context. In other words, if it’s a setup, take it, regardless of what the market’s doing! I use instead the word “methodology” in place of “system,” and “trade idea” or “trade opportunity” instead of “setup” or even “signal.”

    Your common sense approach is very refreshing Michael, and it’s quite different enough from 95% of what’s on trading forums that it’s no wonder you’re having good success. I’ll see you on the leader board my friend! Hope this upcoming week is a good one for you.

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