One of the problems I had when I first started trading full time was that I thought because I was a trader, I needed to trade anything and everything. That’s just not the case.
The problem with trading everything is that with every trade we dilute our edge. Our edge in the market is what makes us consistently profitable over time in the market. If you don’t know what your edge is, you probably don’t have one.
Leveraging your edge
To find your edge, you need to ask yourself:
- Where are my most consistent winning trades coming from?
- What are the similarities between these trades? For example, are they when price breaks a prior point? Is it when two technical indicators align they offer a high probability entry?
- Is this really an edge? Look at how many times the entry signal did not work out. It’s no good knowing that 70% of your winning trades are coming from overhang plays if every overhang play you would’ve taken due to your signal would end up working only 30% of the time.
Once you have an idea of your edge, it’s time to get specific. Define exactly what it is, then apply it only to the situations where your edge comes into play. Are you an expert shorter with a defined setup? If so, why are you trying to bottom pick longs? Where’s your edge there?
You’ve got to know when to hold ’em, know when to fold ’em
If you haven’t listened to Kenny Rogers’ classic, you can listen here. It contains solid trading advice, mainly knowing when to play and not to play. There’s a reason the cheetah – the fastest animal on the planet – only attacks when it is absolutely sure the odds are in its favour. Even though it could catch any animal, the cheetah’s survival depends on its success, and so it is willing to forgo plenty of opportunities until it spots a high probability catch.
That’s not to say all of your trades should be high probability. There are many traders who have success rates of below 50% because of their risk/reward ratios. Personally, I would find that emotionally tough and also if I missed a winner I would know that it may be a while before I hit another one. However, in every trading system, the trader must know when to trade, and when to sit on the sidelines. Their very success, and even survival, depends on it.
In poker, if the cards are poor, you can exit without losing too much money (I don’t actually know how to play poker – if this is wrong please correct me). However, in trading, if the cards are poor then it’s simple – don’t play!
Knowing when to play
Good traders know when to trade. Some of the expert traders out there are just one trick ponies, doing the same thing repeatedly, day in, day out. Does this make them bad traders? Some would say yes, but if they are making bank then I’d say not. These days, I am restricting my trading to plays I am comfortable trading. If I don’t have an edge then I am just gambling, and gamblers don’t win in the long run.
Play the cards
When I first started trading, I used to listen to noise in the market and what other traders were doing. Looking back, I realised this cost me a lot of money. Having an opinion, especially when it’s strong, can be expensive. A good example of this was my view on VRS – that it has a CEO that spends more time ramping than executing. Whilst this may be a valid point, the price went from 20p to 200p. Eventually, VRS may collapse and I’ll be proven right, but did I make money? Very little. I traded VRS both long and short but the meat of the move was in the period where it increased 10x and more in value.
Price and volume tell you everything. In the end, we only get paid by the price, so why do we place too much focus on anything other than price?