You Must Have an Edge

When you start trading your precious capital you must have an edge in the market. To explain what I mean, think about a casino. The Casino has an edge in every game in the casino. For every bet placed there is a probability that the Casino will win. That means that the Casino is happy to lose some bets because it knows over a period of time it will win.

You might think that in any trade you take in the financial markets there is a 50% chance of winning or losing. This is NOT the case. In fact if you believe that you should not trade at all because after you have paid commissions etc you must LOSE over time.

A lot of new traders make the mistake of starting to trade without an edge i.e. without working out a way to put the probability in their favour. Any Trading System is a system that has been designed to have a probability of profitability.

Critical Principle
Do not start risking your capital until you have developed or adopted a Trading System that has an edge in the market.

How do you find an Edge?

A Technical System is one based on market price information only. This is different to a Fundamental System which is based on the understanding of the actual underlying economic and instrument-specific information that moves the market you are studying.

You can have an edge in both types of system. However it is my belief that unless you have significant in depth knowledge of macro-economics or of a specific commodity (for example you know almost all there is to know about how wheat is grown, cultivated, marketed, and consumed) then you are far better off trying to develop a Technical System that has an edge.

The essential assumption of a Technical System is that there are recurring patterns in financial markets. In its simplest form therefore a Technical System with an edge is one that:

1. Has identified a pattern in a specific market.

2. Has identified a way to profit from this pattern reoccurring.

3. Has been backtested (tested over historic data) and shown to be profitable.

4. Has been forward tested (tested in a live situation) over current data and shown to be profitable.

For more details see: www.tradingbook.org/technical-analysis

Whilst it is possible to purchase systems that purport to have an edge in the market, the vast majority for sale DO NOT actually have an edge in the market. Think about it. If you developed a Technical System that was consistently profitable would you sell it? No, you would trade it. There are some exceptions, but very few.

For that reason my strong recommendation is that YOU research, find and develop your own Technical System with an edge.

Yes it is a lot of work. But remember trading for a living is a business. There are no free lunches.

If you insist on trading your precious capital without finding a system with an edge, I can make life much easier for you. Give all of your trading capital to charity. The result will be the same (your money will be gone) but at least you will have a warm feeling, and a tax deduction!

 
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