In-depth Analysis

How to find and maintain your trading edge

It’s often thought that the key to being profitable in the markets is all about having an in-depth analytical process to follow, and while that can certainly help, it’s not the whole story.

To make money consistently in trading, you need to have and maintain an edge or advantage over other traders.

But in today’s connected world can a retail trader have an informational edge?

Is the retail trader able to beat the banks and hedge funds, with all their resources, access and computing power?

The answer to these questions is no. However, that’s not all bad news.

Does information provide us with an advantage or edge?

This is a good question?

On the face of it, it’s tempting to think that the answer is yes, but let’s take a step back and consider the question in more detail.

Thanks to the internet and the world wide web, it’s never been easier to access and gather information on almost any given subject.

Financial markets were one of the first industries to be digitised, and there are thousands of websites, databases, blogs, chat rooms and social media feeds etc. dedicated to them.

But, given that the average human brain is only able to hold onto, and concentrate on four or perhaps five items at any one time, we need to ask ourselves do we need hundreds of sources of information?

Especially when much of the information they contain is likely to be duplicated between sources.

Once again then, the answer is no.

What we need is quality over quantity

Or in other words, a way to identify which sources of information are adding value to us, as well as those that aren’t.

One way to do this, over time, is to create a list of say six sources of information that you regularly follow and refer to.

You’ll soon discover which sources are the ones that contain information that’s relevant, that speaks to you, about the instruments you trade.

Over time you will no doubt edit this list removing some sources and adding others, in what we might call a rolling curation.

Indeed, there are specific tools such as feed readers and clipping apps that allow you to do just this.

Is there another way?

You probably got into trading to try and make money, and not to become the editor of your news feed.

And though it’s always good to have an informational sounding board to refer to and check against, there is a style or method of trading, that in its purest form, allows you to ignore the background noise the ocean of information creates.

That style is Technical Analysis or TA.

TA is the study of price action, or if you prefer of price and, where available, volume.

It is typically carried out using charts; the TA purists believe that these charts contain all the relevant information about a market.

They say, with some justification, that price changes, reflect changes in market sentiment.

Which is itself distilled from the attitudes of all the traders, that are active, in that particular market or instrument at a given point in time.

Quite simply, they believe that the only information flow we need to consider when we trade is the information contained in our chart.

Having just one thing to concentrate on is one of the main reasons that technical analysis is so attractive to new traders. Of course, life is rarely that straightforward and technical analysis is more of an art than a science, because of the amount of interpretation involved in it.

However, once armed with a few simple rules and tools, even the newest traders can quickly make good use of TA.

Does that mean we should only ever look at charts?

I would say no, firstly because trading off of the charts in isolation could be likened to choosing to box with one arm tied behind your back, and secondly because I believe that it’s news flow and macro data that helps to set the price action, contained in charts, in its proper context.

Most market professionals use both fundamental and technical inputs to aid their decision making, and you probably should too.

By blending these disciplines, you will be moving a step closer to finding and maintaining your trading edge.


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