Trading Psychology 5 Edge Execution
Edge Execution
Trading is a numbers game, and markets are based on the mathematics of the traders equation. However, understanding this alone will not guarantee profits. The ability to apply and conform to the math of the current market context is what leads to consistent profits. Beginners often have a misconecption that they need to know what is going to happen over the period of the next X number of bars in order to make a profit. They believe they must enter at the exact right time and price in order to win on a trade. This could not be further from the truth, and anyone consistenly making money from the markets knows the reality. The reality is a trader does not need to know what is going to happen next in order to make a profit. In fact, a professional trader knows that any given trade is irrelevant to the bigger picture, and an income is generated over a series of trades; not any single trade. This menatlity is past the duality of winning and losing, which are simply accepted as part of the job. This can be called the "probability mindset."
Profits are generated over a series of trades, not any single trade. Therefore, it is not necessary to make money on every trade, every day, or even every month to be a succesful trader. It takes time to build confidence, believe this is true and fully understand this concept. Perhaps this is why most traders fail, by giving up before coming to this realization. It has been said that professional traders have "Won the game before they started playing." (Jack Swagger). This confidence can only come from the probability mindset, when a trader accepts he may lose on this trade, the day, or even this year. But he accepts his risk, and trusts the math that over time he will generate a profit. Even if he takes a large loss, or several, it does not matter; he knows he will make it back up. The overall point of this is that losses are part of the trading process. If a trade is a loser, it does not matter; move on to the next trade. Dwelling on losses or a drawdown does not bring the money back, but continuing to trade does. In this sense it can be said that a successful trader "trades his way out of a drawdown."
It is helpful to think of losses as the "cost of doing business" just like any other business would incur expenses while conducting its operations. There are very few (if any) businesses that do not require heavy start up costs, or capital to continue the business while generating profits. Ever heard the saying "It takes money to make money?" Trading is no different, although most traders fail to realize this, and focus solely on profits. In trading, our costs are commissions and losses, which are offset by gains, resulting in a net profit.
Employing your Edge
So what does this have to do with exeucting an edge? Well, it is necessary to understand not every trade is a guranteed success, and there is a random distribution between wins and losses, with any edge. Even the best setup or edge will result in a loss 30-40% of the time. It is virtually impossible to know in advance, which trade will win and which will lose. Therefore it is absolutely imperative to take every trade that meets a traders edge, regardless of how the trader feels, thinks, or any other variables unrelated to the edge. With this said, here are the basic steps to exeucting and employing an edge.
1). Identify edge. Pick a setup (second entry, wedge reversal, follow through bar, ect.) It is a good idea to start with one until familiar with reading prices.
2). Ask yourself at the close of every bar "Is my edge present?" If no, wait. If yes, enter the trade.
3). Execute the edge with a series of 10 or 20 trades, document every trade. At the end of the series analyze results and tweak.
Wishing you the best of luck on your trading journey
-Josh Ridenour
Trading is a numbers game, and markets are based on the mathematics of the traders equation. However, understanding this alone will not guarantee profits. The ability to apply and conform to the math of the current market context is what leads to consistent profits. Beginners often have a misconecption that they need to know what is going to happen over the period of the next X number of bars in order to make a profit. They believe they must enter at the exact right time and price in order to win on a trade. This could not be further from the truth, and anyone consistenly making money from the markets knows the reality. The reality is a trader does not need to know what is going to happen next in order to make a profit. In fact, a professional trader knows that any given trade is irrelevant to the bigger picture, and an income is generated over a series of trades; not any single trade. This menatlity is past the duality of winning and losing, which are simply accepted as part of the job. This can be called the "probability mindset."
Profits are generated over a series of trades, not any single trade. Therefore, it is not necessary to make money on every trade, every day, or even every month to be a succesful trader. It takes time to build confidence, believe this is true and fully understand this concept. Perhaps this is why most traders fail, by giving up before coming to this realization. It has been said that professional traders have "Won the game before they started playing." (Jack Swagger). This confidence can only come from the probability mindset, when a trader accepts he may lose on this trade, the day, or even this year. But he accepts his risk, and trusts the math that over time he will generate a profit. Even if he takes a large loss, or several, it does not matter; he knows he will make it back up. The overall point of this is that losses are part of the trading process. If a trade is a loser, it does not matter; move on to the next trade. Dwelling on losses or a drawdown does not bring the money back, but continuing to trade does. In this sense it can be said that a successful trader "trades his way out of a drawdown."
It is helpful to think of losses as the "cost of doing business" just like any other business would incur expenses while conducting its operations. There are very few (if any) businesses that do not require heavy start up costs, or capital to continue the business while generating profits. Ever heard the saying "It takes money to make money?" Trading is no different, although most traders fail to realize this, and focus solely on profits. In trading, our costs are commissions and losses, which are offset by gains, resulting in a net profit.
Employing your Edge
So what does this have to do with exeucting an edge? Well, it is necessary to understand not every trade is a guranteed success, and there is a random distribution between wins and losses, with any edge. Even the best setup or edge will result in a loss 30-40% of the time. It is virtually impossible to know in advance, which trade will win and which will lose. Therefore it is absolutely imperative to take every trade that meets a traders edge, regardless of how the trader feels, thinks, or any other variables unrelated to the edge. With this said, here are the basic steps to exeucting and employing an edge.
1). Identify edge. Pick a setup (second entry, wedge reversal, follow through bar, ect.) It is a good idea to start with one until familiar with reading prices.
2). Ask yourself at the close of every bar "Is my edge present?" If no, wait. If yes, enter the trade.
3). Execute the edge with a series of 10 or 20 trades, document every trade. At the end of the series analyze results and tweak.
Wishing you the best of luck on your trading journey
-Josh Ridenour
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