Creating a profitable trading edge is the cornerstone to all successful trading methods, but more importantly, all successful trading mindsets. Being able to think within a trading edge takes off the pressure of each individual trade as I am about to explain; it lets the trade just focus on making good solid trades time after time, but without worrying about the outcomes, knowing that overall, the edge will take care of the profits.
What is a Profitable Trading Edge?
A profitable trading edge is something that successful/profitable traders use to their advantage, over the market, to make money. An edge is normally derived from a series of rules and systems that the trader has come up with for a set of scenarios, so that they know what to do and when.
The simplest way to explain an edge is to use the casino example and the way they use their edge over the people who come to gamble in their casinos or play their slot machines. On every game in the casino, the casino holds “the edge”. It is not like the casino is not losing from time to time because they are. They are losing all the time and that is why people are playing and coming back to try their luck regularly.
You will often see people winning jackpots or big hands of blackjack, etc. The point is; however, that the casino ALWAYS wins overall and ALWAYS makes a profit and the reason for this is because no matter how many losses they have, all they have to do is continue to play more games and the edge that is stacked in their favor will eventually come out on top and make them more and more profits.
For a trader, an edge is built over many trades and this is the part that most traders miss. An edge is not just four or five trades, but many trades, so that your edge has a chance to work out over the market.
You Are Going to Have Losses, That is Part of a Profitable Edge
With a profitable trading edge, all you can know is that you have an edge over the market, and that over enough trades, you will make a profit. You DO NOT know; however, what trades will be the winners and what trades will be the losers. No matter how good a trade looks, it can still lose. All you can do is find trades that meet your edge rules and pull the trigger.
This is why it is so important to realize that an edge is built over many trades, not just a few, because you are not going to know if you have three losses in a row coming your way or five winners coming up. All you can know is that you have an “Edge” over the market, and that over time and enough trades, ensures you to rise to the top and make profit.
With this system, the same as the casino, it is just a matter of finding as many trades that fit your edges’ criteria and “pulling” the trigger as many times as possible, so as to create profits.
NOTE: One site note about win percentages. You will often hear people say, “I have a 60% win rate” or something similar. Keep in mind what we have just gone through. This does not mean that for every 10 trades, this trader is winning 6 and losing 4; that is not how it works. If you are to have a 60% rate, it means that, for many trades over a long span, you are averaging 60% winners. That is taking into account all the losing streaks where you had 5 losses in a row, all the winners, and everything in between.
Stop Focusing on the NOW Only
The biggest thing you can get out of this lesson is the mindset change because it has the potential to do absolutely HUGE things to your trading if you let it. Just like the casino, you need to first have a profitable trading edge. Then, the most important part is not focusing solely on just each individual trade you make; but rather, working to the bigger picture and working to the edge.
When you are only worried about the individual trade you are putting on, and then the next individual trade you put on, you start to focus on the wins and losses and, if you have a few losses in a row, the pressure can really start to build because of this mindset. This is what the majority of traders are doing. They are going from one trade to the next to the next.
What this also does is it starts to build stress, panic, and trade over-management into trades. Because traders get so focused on the individual trade, they lose focus on building an overall profitable edge.
Here’s an example of what I am talking about. Trader Jo makes a trade and it loses. She is not too happy about it, but at this stage, she is not too concerned. Jo makes another two losses in a row. All of a sudden, Jo starts to panic.
She changes her trading rules. Next to change are her trade management methods because she is now doing anything to make the next trade a winning one and get that good feeling back.
The Ultimate Trading Mindset
The ultimate trading mindset is obviously one that allows you to think freely and make great trading decisions time and time again and this is what building and thinking with a trading edge is all about.
Obviously, the outcome of individual trades makes a difference to the overall bigger pictures, but as explained at the top, you have NO CONTROL over whether your next trade is going to be a winner or a loser.
You don’t know if you are about to hit a string of five winners in a row or 3 losers in a row. You just can never know. All you can know for sure is that you have a profitable edge over the market, over many trades.
So, what is your job? Your job is to remember this, and every single time a setup comes along that fits the criteria of your trading edge, pull the trigger and manage the trade as per your trading rules.
When the losses come – and they will come, don’t let them throw you off your edge and don’t start changing your rules or method. If you change your rules or method during the losses, then you never give your edge a chance to work out and be profitable over the market.
This is one of the most important lessons that can be taught to a trader of any trading method.
Safe trading and all the success!