2016-09-10

Hi all,

Any successful trading strategy must be based around some sort of market edge, something that gives you an advantage to make money from. Without a defined and well understood edge, your trading is likely to be hit an miss at best and probably unprofitable and unsatisfying.

This post is longer than I had planned, however it is important to get the underlying understanding clear.

I'm amazed by how many traders and forums seem to completely lose sight of the edge they are trying to exploit as their personal biases and bright ideas distract from, and can destroy, the edge they started with. I'm as guilty of this as anyone else. I think I can out smart the market and if I just add this filter, or this money management idea I will have created the holy grail, be rich, and never have to work again.

Sadly, after many years of trying anything and everything I'm still working full-time and a long way from sitting on beach while my fully automated robots rake in the money. I think I'm smart, committed, and open to new ideas. I've spent loads on courses, books, EAs. I can turn my trading ideas into automated robots and backtest them to see if they work, what could go wrong? Clearly I'm not approaching this in a way that is leading to the success I want or I wouldn't be writing this post. Does this sound familiar? I'm sure I'm not the only one who is frustrated by putting in heaps of time, effort and money and am not getting the returns I want. Trading is not like a job where you get paid by the hour.

Time for a re-think on what I'm doing.

One of things I'm doing to get back to basics is to be really clear about what the trading edge is I'm using for a particular strategy I'm building a robot (EA) around. I'll share my current edges with you in a minute.

A trading edge is not a strategy, it is the idea of how you think you can exploit the market and make some money. Turning that edge into a successful strategy is difficult as there are so many decisions to make such as choice of instrument to trade, timeframe to trade, entry rules, trade management rules, exit rule, money management rules, etc.... You need to get all of this right to succeed with a particular edge. No wonder it is so hard and people are so protective of their successful strategies.

Attached is a table of a few trading edges I've build trading systems around. These are not strategies, only the edge to base a potential strategy on. Without a solid edge we are wasting our time on strategies.

In the attached table I've outlined a series of edges, potential ways to exploit them, risks and potential mitigation strategies. This isn't rocket science, but is an essential first step to developing a trading strategy (manual or automated). The edges are in 3 categories - mean revision (ranging markets), trending and price patterns. These are not mutually exclusive as some trading edges may be used across two or even all three categories. However it is useful to group them into logical categories based on their market application.

I have no doubt there would be dozens of successful trading strategies to exploit each and every one of these edges.

I'm deliberately focused on rules based trading as I'm a hopeless discretionary trader. Greed and fear usually get the better of me when the pressure is on and there's serious money in a trade. I want clear, objective rules to follow so there is no doubt at decision time, and it is a robust, repeatable process year after year. I appreciate others may be good at discretionary trading, however this doesn't work for me. As a bonus, a strategy with set trading rules can be automated so I'm not tied to a computer to trade. This rules based approach is not critical when thinking about the edge your are using to trade, but as soon as you take the next step of designing a strategy to exploit the edge rules become important very quickly.

The attached list is brief and I encourage you to add you edges and re-publish the table to share with others. The good thing about sharing an edge is it isn't giving away the whole strategy so hopefully people with successful strategies will be willing to share their underlying edge they are using.

If I get a good response I may set up a series of other threads focused on individual edges and strategies to exploit them.

I hope you find some new ideas in the edges attached and will contribute your own. If updating the attachment please try to be clear and concise. Remember you need to save Word documents in the .doc format (save, file type = Work 97-2003) to upload it. The .docx file extension will be rejected.

For those readers who are negative and like to criticise, the reality of any sort of trading of investing is there are risks of failure and not everything works all the time. We know that. The trick is to look for the ways in which things can work, overcoming the barriers and risks, and not just take the lazy option and look for why things won't work then give up. If you can not be constructive in your criticism, please keep your comments to yourself and/or move on.

Thanks Drew

Attached Files

Edges for rules based trading v0.1.doc
(58.5 KB)

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