Trading with an Edge

[New Year]

From my archives.......

Trading With an Edge

Unsuccessful traders are obsessed with market and data analysis. They crave the sense of
certainty that analysis appears to give them. Although few would admit it, the truth is that the
typical trader wants to be right on every single trade. He is desperately trying create (the
illusion) of certainty where it just doesn't exist. The irony is that if he completely accepted the
fact that certainty doesn't exist, he would create the certainty he craves: He would be
absolutely certain that certainty doesn't exist.

You either get this, or you don't.

Conversely, traders who have learned to think in probabilities are confident of their overall
success, because they commit themselves to taking every trade that conforms to their
definition of an edge. They don't attempt to pick and choose the edges they think, assume,
or believe are going to work and act on those; nor do they avoid the edges that for
whatever reason they think, assume, or believe aren't going to work. If they did either of
those things, they would be contradicting their belief that the "now" moment situation is
always unique, creating a random distribution between wins and losses on any given string
of edges. They have learned, usually quite painfully, that they don't know in advance which
edges are going to work and which ones aren't. They have stopped trying to predict
outcomes. They have found that by taking every edge, they correspondingly increase their
sample size of trades, which in turn gives whatever edge they use ample opportunity to play
itself out in their favor, just like the casinos.

If you are one of those who has released the desperate need to be right on every trade and
is confident you can consistently apply tactics that will keep the odds in your favor no
matter the market does next, you get it.

If you are one of those who is still chasing after the "neural network" system that will
somehow accurately predict what the market is going to do next (good luck with that!), or
who in general still believes there must be some way to know the unknowable (what the
market will do next), or who sees no way that straightforward tactics-based technical
trading methodology could possibly work, then you don't get it. Trading will always be
frustrating for you.

Understanding these paragraphs, quoted above, and applying these truths to trading, is the
Holy Grail. It's sitting right in front of you. All you have to do is pick it up and drink from it.
The crazy thing, though -- almost no one will!

[v555]

Very well said, New Year !

Your above observation is one of the most sensible message a newbie Trader can come across.

In this context, here is some more relevant message(s), taken in full from another Forum :

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Hello everybody. Today I will add this post because I think it is important now to explain again the philosophy of the system and why it should be very profitable for everyone. First, I would like to focus on the fact that the most important thing in day trading is the psychology. The fact that with the same system some people are very profitable and others are not sounds like an evidence, doesn't it ? So the first thing you have to do as a trader is to focus on the process ! What does it mean ? It means that you have to be strongly disciplined and focus only on A+ trades. The system presented here is profitable for me and for many people of mine (some of my friends, my brother, and other people I don't personally know but who told me) because they all believe in the system and they strictly respect the rules. So what are the 10 rules to follow ?

- The 1st is to trade only with the trend : I mean if the trend is up you buy and if the trend is down you short

- The 2nd one is to focus on A+ trades : I mean that over-trading is really dangerous. You will be profitable if you know what trades are really worth it. It is a real mistake to take all signals. Take only those that offer you a good R/R ratio.

- The 3rd is to check the trend on higher TF : if you have an uptrend on the 5 mn chart, but a strong down trend on the 15mn or 1h TF, you know that it is risky. You are in a corrective wave and the profit should be low. Of course the trend can change but in 80% of cases the trend will continue that's why we say the trend is your friend ! Trend will change once time but it will continue many times (look at Eliott waves theory or Dow theory)

- The 4th is to accept that you can lose money. No system has a 100% rate of wins ! If you don't accept to lose, you will never earn money ! Trading is all about probability : your job is to accept the risk because nobody know where the market will go, and it is to minimize this risk. If you master this philosophy I am sure you will be profitable. To minimize the risk correctly you have to focus on A+ trades (look at 2nd rule). Of course you will miss opportunities, but on the long term you will be able to maximize your profits.

- The 5th is to trade like a robot not like a human. To be human is your worst enemy because acting as a « normal » human will lead you to trade with your emotions. A robot has no emotions. Of course it is impossible to trade without any emotions, but you have to learn to master them ! When you feel that emotions guide you, please take a long breath, and try to analyze why you took your trade. If all conditions were met, that’s a good trade even if you loose money because you focused on the process and your stop is here to protect you against the market. If conditions are not met, the nit is a bad trade because you try to enter the market against your trading plan and even if you win money it is a bad trade !

- The 6th rule : Adapt your position size !!! If the market is strongly bullish and that you get an opportunity to enter long with a tight stop loss so that you have a high potential R/R ratio, then you have to take a maximum of risk ! I mean you have to take a big size position. And the way to do that is to re-enter at a new pullback to pyramid your initial position. If you are in a corrective market then you have to take a little size position. For example you are at a resistance point in H1in a bullish market and you see a divergence on your indicators and a shooting star candle whereas you have a down trend on 5mn still started, then you can look at a good entry but as it is a corrective market, you reduce your standard size (divided per 2).

- The 7th rule : Never average down a losing trade ! It is a stupid mistake ! Why ? Because it is completely illogical : you have a stop loss which is here to protect you against the market if you are wrong. So average down a losing trade is the same that making a minor error a big one ! Every serious people will teach from their errors and will try to avoid to repeat it of course. If you average down a losing trade you continue to be wrong !

- The 8th rule : Try to specialize you on 5 or 6 pairs ! Doing so you will be an expert and you will increase your winning trades. Personally I recommend you to avoid exotic pairs because of volatility and less liquidity. I focus on GBP/USD, GBP/JPY, EUR/USD, EUR/JPY, AUD/USD, USD/CAD. This way I trade on major currencies which are USD, EUR, JPY.

- The 9th rule : Keep It Stupid and Simple (KISS) ! People often want to optimize the system adding new indicators : that’s bullshit ! Use only indicators that you really master ! The most important in trading is price and time. All indicators are just a visual representation or a derivative of price action. I see many systems with complicated indicators which are almost derivative of well-known indicators. Many gurus want you to believe that they found the grail. Think about Belkhayate system for example (center of gravity), even well know forexfactory systems are based on « proper indicators »…I will not tell you what are these systems that’s not my goal ! What I want you to remember is that you must use « simple » indicators that you correctly master, to help you to confirm the price action. That’s why I say that you can use the indicator of your choice. I use GMMA because I think it is a good visual tool allowing you to see the difference between the fast market (speculators) and the investors. If investors and speculators are on the same side, that’s a good market to trade. I also use DMI or MACD to identify the trend and to confirm the EMAs. MACD is specially interesting because of divergences. Timing is very important and to get in the market, I wait for a pullback and confirm with an oscillator. My prefer one is the Stochastics. My brother prefer to use the RSI. Other people can use CCI or whatever you want

- The 10th rule : Don't search for another new system anymore ! Try to master this system, practice a lot to improve your skills. Looking for another system is wasting time. And it is a serious alert that you are not serious enough to be a trader ! Why ? Because it is an evidence that you are looking for the grail which is something very dangerous and which will lead you to lose all your money. And we all know that te first step to earn money is to avoid to lose your capital. Of course there will be losing trades but please be serious and treat trading like a business not like a game ! If you want to play then go to Vegas ! This system is a large part of your trading plan that you always must respect. It sounds like something easy but believe me : it is very difficult ! Very famous traders lost their money before winning millions ! Have a look at the story of Martin Schwarz.

OK that’s all ! Never forget these rules, respect the system like a robot, don't waste your time and trade like a pro. Even if you are a newbie, you will be a profitable trader very soon ! If you don't believe me you will continue to lose your money and waste your time looking for something that does not exist : the grail !

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I must say I agree with every single word that you've written. People usually don't believe in simplicity in this business. They are trying some system and after a few losses give it up and jump to another one - and everything repeats again and again. But, in fact, instead of looking for something that doesn't exist, we just have to master one thing and that's it.
Of course, your method is not the only way to make money in trading, but I'm pretty sure it's one of the best and easiest, and it's really powerful, because it works on any pairs, time-frames and markets (not only Forex) and provides a great risk/reward ratio which is the most important part of money management. Personally, I use the same principles in trading but without any indicators except MAs and a few candlestick (PA) patterns. Just like you, I believe simple is the best in trading.

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[The Jumper]

Learnt some few things here. Solid nuggets of information. Strict adherence to these tips would help any trader...whether you're a newbie or not.