Create Your Own Trading Edge

By Dan McMullin   ISSUE 211 | DEC 2003

There is an old adage that to be successful in trading you need to have an "edge." For instance, floor traders have long been considered to have the classic edge - immediate access to the flow of orders. They get to see what specific players are doing at any given moment, and hear the crowd to gauge the veracity of a price move.

But, what about the rest of us? How can a back-office trader compete on such a level? To tilt the odds in your favor you need to "create your own trading edge." This article identifies a few areas where you can do just that. Take time now to consider these categories, and decide if you can develop your own personal edge in trading.

Master a Specific Skill

Think about something in your past you were very good at, like a certain game or a sports activity. As a practiced expert, your best response in any given situation was a matter of habit. It's the same with trading. Certain skills will serve you well while others may be a hindrance. Resolve now to identify and master those skills that can provide the edge you seek.

Speed can be your edge. Electronic markets have leveled the playing field. Now more than ever, it's the quickest fingers that get the first fills. Consider an S&P trader who watches the NASDAQ for confirmation. In an instance where the NASDAQ ticks to new highs the fast trader may be able to buy the S&P before new highs are hit in that market. For that trader, speed is the edge.

Cutting your losses can be your edge. Based on the number of traders who fail to cut their losses, this is likely an acquired skill. Remember, futures trading is a zero-sum activity - every dollar given up by a trader is transferred to other traders elsewhere in the system. So, if cutting losses is a valuable skill that few traders have, then mastering it for yourself can provide you with another edge.

A related benefit of cutting losses is increased self-confidence. You can become a fearless trader once you have confidence that you won't freeze when you place a Stop Order. A confident trader may be more likely to pull the trigger at the right time – and, that could add up to a big edge over time. Can you think of a good reason why you would not choose to cut your losses or to become a more confident trader? If not, then resolve now to make it so.

Discipline can be your edge. Let's not forget about patience and discipline. If you have a game plan worked out - one that you've tested and believe in - then exercise the discipline to stick with it diligently and be patient to take only those trades. If you can't remain disciplined to your chosen methodology then you haven't yet found a trading plan you believe in - and you don't have the edge that can come from such a plan.

Master a Trading Methodology

Now consider this, if having certain skills can benefit you as a trader, the same is likely to be true of trading styles and methods. How well do you think you would succeed if you set out to simultaneously be the world's greatest swing trader, trend-follower and option writer? The methods can conflict, so it's a tough goal.

Choose instead to master a specific methodology to create a personal edge in trading. Like the earlier example with skills, over time the details of your chosen method will become second nature to you. You'll instinctively identify when a new signal is developing, or when it's setting up for a fake out. Your best reaction to the unfolding signals will be a matter of habit, and your mind will be freed to absorb other subtle clues and details of the trade.

Specialize in certain indicators to gain an edge. Consider each element of your analysis and train yourself to become an expert in its function. If you use Stochastics, become intuitively aware of every nuance of the indicator. Particular chart patterns or support and resistance areas can each be mastered in their own way.

Perhaps you may choose to focus on certain markets. Some have said that different markets have their own personalities. Some traders do well only in volatile markets while others need slow and steady environments. Why not seek an edge by choosing to be an expert on a particular market or class of investments?

Talk with a full-time trader about his work and you'll hear him describe himself according to his method of trading or chosen market. Traders claim to "play the gap" or "buy pullbacks," or they are "range-traders," "spreaders" or Eurodollar traders. If you haven't yet defined and mastered your own specific methodology, then you still have an opportunity to gain a personal edge in your trading.

Master the Tools of Your Trade

A master carpenter once advised, "Control that power tool, and don't let it control you." That simple wisdom applies to any craft. Gain yet another edge in trading by mastering the trading tools of your profession.

When you step behind the trading screen are you unsure of your equipment and the processes behind it? Does it take two or three tries to place an order? Are you uncertain of when to confirm-out a cancelled order, or how best to avoid a double fill? Do you find yourself getting incorrect or unexpected fills, losing track of your position or receiving unabled orders when you expected a position? If so, your success or failure that day has an unnecessary element of randomness.

Of course, you don't want to be the apprentice who cuts his thumb off in the buzz saw! But less obviously, you also don't want to be the guy who everyone knows is in danger of cutting himself every time he shows up.

Resolve now to be like the master carpenter in control of the power saw - sure-footed, clear-eyed and focused with purpose and clear intent - and you'll have gained another edge in your trading.

Game the System

Trading is a serious business. Still, that doesn't mean you can't "game" the system. Whether it's a board game, a card game or a computer game, any process based on sets of rules will contain unique cause-and-effects. Subtle opportunities can become apparent with experience and training. As a trader, you want to always be observing how the rules of the game operate to gain yourself an edge.

For instance, in electronic markets the first fills (at any given price) go to the earliest time stamps. Someone always gets to buy the low of a move - and that someone is the person who placed his order sooner than the others. If you plan to buy at a certain price, why wait until 10 minutes before it's due to be hit? If the market just touches your price and rallies, orders placed earlier than yours are going to "take your fill." Always seeking the earliest time stamp is an example of how gaming the system can provide you with an edge.

Perhaps other subtle and esoteric cause-and-effects exist for the markets you follow. In general, learn all you can about the rules of the markets you follow, and seek to gain another small edge from your observations.

Develop Multiple Edges

More is definitely better when it comes to having a trading edge. The truth is you may decide you need to specialize in more than one area - as long as they remain complimentary. As you gain experience in trading you'll come to know which areas are best for you to nurture.

Grow your list of skills in need of attention, and then methodically focus on becoming the best at each one. Thinking in terms of each skill providing you a personal trading edge can motivate you to achieve the success you seek.

Dan McMullin is a former floor trader and former brokerage firm principal. He is Director of Business Development at Lind-Waldock, A Division of Man Financial Inc.

Laura Oatney is editor of LindForum. She can be reached at editor@Lind-Waldock.com.

Futures trading involves risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources, which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading Advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2003 Lind-Waldock, A Division of Man Financial Inc. All Rights Reserved. Futures Trading Involves Risk of Loss.