Obviously, you need an edge with your trading methodology or you’re not going to make it. If you haven’t back-tested it or cannot articulate it, you may not have one. But many traders who do happen to have an edge with their methodology are still not performing well. I sometimes refer to this as the ‘profit gap’ – the difference between your plan/method and your actual results. As a trading psychologist and an active trader myself I have a different view of “edge”.
As traders, we use logic and data and a method to justify our decisions, and we spend lots of time looking at charts….but at the crucial moment, where the rubber meets the road, it’s our emotions/feelings that actually provide the fuel to pull the trigger or not, whether it’s an entry or an exit, a winner or a loser. See my recent webinar where I show why your emotions can not be ignored and how they play an important role in your trading decisions.
The reality in trading is that you are your own edge. It’s in the gray matter between your ears. More specifically, your edge is your ability to adapt to whatever you see in the market. Call it cognitive flexibility, or whatever you want, but this is the reality of trading.
For example, when it comes to entries, one’s ability to adapt is critical, especially for the discretionary trader, because set-ups often don’t look neat and clean. Mixed signals and some degree of ambiguity are common. Ability to tolerate ambiguity is a psychological skill. Part of your personal edge.
And when it comes to exits, adaptability is even more critical. While entries and trade location are important, its ultimately your exits that will determine how much success you experience as a trader. Dealing with losers effectively and maintaining flexible expectations is a function of adaptability, your personal edge.
Trading involves a lot of disappointment (entries are not always perfect, targets not always reached, we exit and then see it go on to work, etc), and that disappointment often puts traders on tilt causing emotions to trump will power, paving the way for traders to veer from their plan and break their rules. Resilience in the face of disappointment is your personal edge.
Most people focus on what causes the market to move, but the harder part of trading is knowing what causes YOU to move. Once you have a handle on understanding on what causes the market to move you need to work on understanding yourself to know what causes you to move. This is how is how you develop your personal edge.
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