WHAT IS YOUR EDGE?
I talk about so many different things in here that at times we can all get caught up in, "what the hell is he talking about now?"
I posted a table yesterday about the month end bias in May for the stock market. A question was raised about the large portion of the total gain being in one trade. That is a legitimate question, but it completely missed the point. I specifically stated you would not trade off this alone. That is the reason why, most of the net gains were all in one trade. However, the edge in that is knowing that 75% of the time prices moved up, that is what we call an edge. Most things are about 50/50 as far as testing out things, so when you have something that tells you something will happen 75% of the time, that is what we call an edge. That does not mean it happens every time, 25% or one out of 4, it does not.
Which would you rather bet on something that happens 1 out of 4 times or 3 out of 4 times?
I have recently being going through a self analysis to make sure I am focusing on what me edges are in trading and to see if I am doing anything that does not have an edge. The above chart is what I consider to be an edge that I have, but is not quantifiable. There were a few technical things I look at that told me to look to buy Cotton this week. When I went to the chart though, I just felt this was a very marginal bar pattern in the midst of a congestion period, in a downtrend. I determined that it was better not to try and play a breakout out of something like this. That decision was a good one as that trade would have been a loss.
My edge in this area is just being patient, and understanding through experience, that swinging at marginal patterns like this is not going to work out too well over time. This is something that I can do better than most, so I consider that to be an edge. Most mechanical things we do as much as we might think they have this huge advantage, really when you test them out, do not have much of an edge at all. It is sobering, but it is reality. I read all these writings from people about these new technical approaches, and I often take a gander at them. What I inevitably find every single time, is that they are about 50/50. I talked recently about using Fibonacci analysis, which is a perfect example of something that has no edge at all. The edge in using most technical approaches, is how you apply them. For example buying a 10 day low may not show much of a gain net over time, but if you test it during periods where there is a strong up trend, you will find it does have an edge.
It is important to know what your edge is. If you do not have one, find one. If you do, make sure you are using it to your full advantage. Let me give you another example. Last year I was using an oscillator as part of my trading and I thought it had a great edge. When we got into these runaway trends I found out very quickly, it did not at all. It indicated one sell after another that was no good. I stopped using it because it had no edge. I found it was not of value during trends.You have to constantly stay on top of what you are doing to make sure that you are still trading in a way that has an advantage in the markets. Some of them that have been there for decades have been nullified by uncle ben and company.
Make sure that what you are using still has one.