Home DAY TRADING Finding the Trading Edge in Forex

Finding the Trading Edge in Forex

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Finding the Trading Edge in Forex

Edge in Forex defined

Edge, as a forex trading concept, is almost mysterious. You will often hear traders, especially the seasoned ones, ask if your trading strategy has an ‘edge.’ In this sense, the edge is the quality of a trading strategy that gives a trader a cash advantage over other market traders. So, a seasoned trader could be asking if your trading strategy is capable of generating more returns compared to other market players when talking about the edge.

In another sense, an edge is a trader’s ability to generate results that exceed pure lack over a long period. It is common for a trader to have a perfect day for the market to take back everything shortly afterward. The tendency of a trader to generate good returns with a certain sense of consistency is an edge.  

Edge in Forex defined

Why is edge important for forex traders? First, one has to consider the nature of forex trading. Usually, market players implement strategies they have read about in books, articles, and online forums. They are likely to implement the same, even when using automated trading systems. A consequence of the resulting ‘herd mentality’ is many traders going bankrupt for ‘buying dips’ when the market is dipping, because that is the conventional wisdom.

An edge, therefore, sets a trader apart from the crowd. And this is the only way you can beat the system. Often, the sharks in the market are on the lookout for the lemmings to squeeze the money out of their hands. Having a trading edge enables you to escape the sharks and even take advantage of the lemmings’ herd mentality.  

Trading Edge: So many ways to excel

By consensus, the edge is your position’s ability to earn more than other market players’ because you are a few moments ahead. If this is a trading edge, then it must come from somewhere. For instance, insider information gives you an edge, access to better market analysis, and trade execution technology gives you an edge, following? Hence, we can infer the types of trading edges from whence they come.

  • Technological/speed edge – a trader with this edge uses fast technology such as high-frequency trading systems. HFT is an elite tool whose speed of trading is almost real-time. It means the trader never experiences lag and will always sell/buy at the quoted price. Analogically, a trader that uses an HFT system is like the fastest squirrel in a dray that still gets the nut. But the coming of better and quicker technology means that the edge is not sustainable.  
Technological/speed edge
  • Information edge – this edge is a consequence of a trader having advance/better information than all the other market players. An information edge is hard to come by, especially for retail traders because of the distant proximity with the market movers. However, the ability to anticipate things like Central Bank decisions better than everyone else confers an information edge. Speed and information edges are unachievable by the greater percentage of forex traders.
  • Strategic/statistical edge – a strategic edge comes from a trader’s ability to create a strategy that positions him/her ahead of most of the market players. It is one of the edges that traders can achieve but not without time and effort. Usually, traders gain this edge by conducting a thorough and unique statistical analysis. Such traders have spent years cultivating the statistical analysis skill, either by relying on their mental prowess or by leveraging tools such as programming languages to build algorithms. A great analogy that applies here is a hunter that develops and implements the best deer-trap. Anyone that creates and executes a better than average trading strategy can gain a strategic edge.
  • Psychological edge – having been in the market for long enough, traders tend to develop mental toughness. The ability to steel nerves in the face of a fast-moving market is hard to come by. Moreover, a psychological edge could imply a trader’s ability to ‘feel’ the pulse of the market just by glancing over a few charts. Mastering the mental game is one great way to unlock profits because you are more likely to avoid herd mentality and make more objective decisions.

Whether all of the above are trading edges or not depends on what works for you. The rule of thumb in forex trading is to put in the hours until you find what works for you. Just remember that your edge gives you a margin of superiority compared to everyone else.

Find your trading edge

So, what is your edge? To find the best answer to this question, one must realize two things. First, it takes time, even years, to discover one’s edge. Secondly, an advantage is not always profitable. It is because the market is dynamic, and the price action is ever-changing. Thirdly, one must realize that edge is indiscernible over the short-term. So, do not confuse a one-week profit streak with an advantage.

trading edge

Edge plays a crucial role in profitable long term trading. Without it, the discouragement of frequent losses will soon push you out of the market. To find your edge, polish these two skills. Firstly, ensure you are excellent at risk management. Certainly, minimizing risks and maximizing gains is the only sure way to consistent profitability. Secondly, be disciplined! Discipline means retreating and recalibrating your strategy after a loss. It also means focusing on the task at hand (strategizing) with all your energy.

Conclusion

Forex trading is for everyone but the meek. Successful trading means developing some superiority over everyone else. It could be superiority in terms of your trades’ speed, the quality of the information you have, the robustness of the strategies you develop, or your mental toughness in the face of storms in the market.

An edge is a potent tool for profitability by and large, but it is not always right. Market dynamism often gyrates price actions, and it could undermine your edge. The secret is to stay flexible such that such dynamism becomes an advantage rather than an edge-blunting phenomenon.

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