Finding consistency as a trader isn’t easy. Much less, knowing where to get started. You hear it said all the time, “if you want to find longevity as a trader, you must study.” But where do you begin? That’s the question many have who want to enter this crazy world of infinite possibilities. To that end, in this post we’ll discuss where to begin finding an edge in trading, and the fastest way to consistency.
Table of Contents
Why It’s Hard to Find an Edge in Trading
Trading markets can appear overwhelming to outsiders. For that reason, retail traders are more than willing to hand their hard-earned dollars over to someone who seems more knowledgeable than themselves. Yet, more often than not, someone gets burned along the way.
Then, as you begin to seek out education to manage your own money, you find there is no standard. There is no Trading University to attend — no 4-year degree with a certain outlook on your income potential once you graduate.
Sure, there are plenty of finance majors who end up on Wall Street or working for a bank or institution, and they may have a salary expectation. But for all intents and purposes, the majority of us are just stuck piecemealing our own course together — here a little, there a little. Shooting for the stars and hoping we make a million bucks, we’re really just flying by the seat of our pants.
Not only that, but there are so many things to study, it can be overwhelming trying to figure out where to focus our efforts.
Education Services – The Pros and Cons
While there may be no standard of education for the market, there are plenty of people willing to sell you their services. Many will promise you the moon. They will attract you with catchy personalities, brokerage statements, promises, flashy cars, and the like. You’ve probably seen the ads on YouTube and all of their “subscriber success stories.”
We don’t doubt that many of these traders have made a lot of money. But at the end of the day, they’re selling you something. At $2000/subscriber and a chat room filled with 1000 subscribers, that’s $2,000,000/year in subscription revenues they’re raking in. Trust us, to them you’re just a number. Who needs to make millions in the market with that kind of revenue?
Others may appear more real, less in your face, and more devoted to their constituents’ actual progress. No doubt, there are some great services out there — great teachers, too. But the hard part is knowing who to go to, who to trust.
Too often we hear of newer traders who get burned too badly before they find the right mentor or education. It’s a sad reality.
So it’s no surprise that finding an edge in the market is difficult. Our advice is to simply be aware of what’s out there, and protect yourself and your capital by doing your research first.
The Myriad of Different Strategies
If the number of different gurus and services isn’t overwhelming enough, then imagine when you’re faced with a million different strategies for making money. After all, you can trade futures, equities, forex, crypto. You can make money buying, you can make money selling short. Options, derivatives, indicators, algos, etc.
At the end of the day, you don’t have enough time in your life to study all the different ways you could find an edge in trading. They’re endless.
While we discuss a lot of the more popular strategies here at TradingSim, the truth is that we only scratch the surface.
So, what can you do? Where do you begin?
That’s the very question this trader asked on Twitter recently, hoping for some wisdom from a popular online trading personality named AllDayFaders:
Such is the plight of many beginners. So many directions, so many choices. Where do you begin?
The 5 Steps to Finding an Edge in Trading
AllDayFaders (ADF) had a great response to this person. It’s very simple, and straightforward, and for that reason, we wanted to share it with you. In the rest of the post, we’ll pick apart each one and add some extra insight. But the simple answer is right here:
ADF always has a wealth of great tweets to discuss the deeper details of consistency in the market, just a simple search for #beartipoftheday will turn up some great resources. And while his advice here sounds simple, there are a few caveats to consider when you start out.
Are you needing to trade as a source of immediate income?
Do you have the time and patience to discover what works best for you?
The answer to these two questions may determine what path you take to find an edge in trading. But regardless of the answer to either of those questions, you must start some where. And no matter what, the 5 things you need to do remain the same.
In large part, your success will depend upon how disciplined you can be at following his advice, along with how realistic you can keep your expectations and resilience. The most important thing is that you get started, not where you start.
On that token, let’s find out how to pick a style that will lead to your edge in trading.
1. What is Your Style of Trading?
Trading is very much dependent upon personality. Some of us are more qualitative, others quantitative. You might excel with spreadsheets (no pun intended), while others are better at intuition. Maybe you’re a cautious, slow mover, while others are more energetic with a need for speed and danger. Long-term relationship kind of gal? Or short-term kind of guy?
Pick a style that suits you. Perhaps you have a full-time job so you’re forced to either swing trade or day trade for a very narrow time of the day. A lot can dictate where you get started as a trader.
Authenticity In Your Trading Style
Too often we find that beginners try to emulate the gurus they watch and learn from. And while some may become successful doing this, we argue that it’s largely due to similarities in personality and style.
For that reason, it’s important that you strive to find a style of trading that fits you. Be true to yourself while you learn, but take everything you learn with a grain of salt. Better yet, take everything you learn and apply it to the crucible of your own goals, personality, and aspirations.
Our suggestion is to take the following list as a guide to think about this question as you explore. Meditate on it for a bit, do some research, and then figure out which one you want to be. After doing so, narrow your “universe” of education/educator results to what resonates best with you.
Are you willing to hold stocks over night? How will this affect you?
Is a few weeks to a few months too long for your patience?
Are you ok with slower growth at the start?
Can you handle larger price swings in your account?
Are you a patient person?
Do you have the time to generate ideas at night and on weekends?
Can you be disciplined to set entries, stops and targets and stick to your system?
Do fast decisions make you nervous?
Are you good at hand-eye coordination?
How is your spatial memory and recognition?
Do you handle pressure well?
Does your schedule allow you to spend enough time trading during certain hours of the day?
These are just a few things to consider when getting started. Ultimately, you’ll have to make the best decision for yourself. But know this: there is no holy grail in the markets. Simply be authentic to who you are and where you want to be, and get started.
2. Pick a Side to Find an Edge in Trading
We can’t stress the importance of this enough. ADF really hit the nail on the head here.
There’s an old proverb that says, “a double-minded man is unstable in all his ways.” Consider this as you being your trading career.
Juggling too much at one time is hard to do when you really don’t even know what you’re doing yet. It’s a recipe for disaster. You don’t see accountants managing operations and marketing and customer service. You see them doing what they do best, keeping the books for the company.
Trading is no different. Treat it like it were a career path. The more you specialize, the better off you’ll be.
Think about the following as you make your decision:
Long Bias or Short Bias
Are you optimistic or pessimistic on the stocks you play?
Have you studied the impact that fundamentals and offerings could have on certain stocks?
Do you like a fast buck or slow and steady growth?
Will you trade low priced, higher-volatility stocks or higher priced growth stocks?
Regardless of your choice, its best you make one. A lot of what will determine your success is mastery of a very narrowly focused effort.
You don’t find many professional players playing two sports anymore. Deion Sanders and Bo Jackson were the exception in the old days. Stick to what you do best. There will be plenty of opportunities on either side you choose.
Like ADF says, you’ll have plenty of time to learn the opposing side later on — if you so choose.
3. Observe and Track until You Find ONE Setup That Fits Your Style and Side
Trust us when we say it won’t take long to find a setup. There are thousands. We’ve written about 100s of them on this blog. A simple good search will turn up even more.
Once you’ve narrowed your style of trading and decided whether you are a long-biased trader or short-biased trader, you’ve done half the work. This brings you to the climactic part of your early career — deciding what your “setup” is.
You can be a long biased pullback scalper. Or, if you like the short side, perhaps the vwap boulevard or 3pm bloodbath is more your style? If you’re a swing trader, you might like the high velocity moves that liquidity traps provide. No matter what you choose, we suggest finding the strategy that returns the biggest bang for the buck. High time value, as it were.
Likewise, the strategy or “setup” that you choose should fit your personality just as much as your style and side.
The Fastest Way to Find a Profitable Edge in Trading
Observation. Screen time. Turning over charts. Reading books. Having at least a basic understanding of chart patterns and tape reading. They are all great things to do to get you where you want to be.
But if you’re still struggling with seeing the markets on your own, it would behoove you to borrow on the wisdom of those who’ve gone before you.
Every other profession in the world requires some amount of proper education and modeling. Trading is no exception. The trick is whether or not you have found the education you want and the quality of that education.
In a prior post, we discuss ego as a subconscious habit that might be affecting your performance. We mention this here because the longer you find yourself trying this or trying that, the longer it will take you to find your edge. In other words, the sooner you can check your ego at the door and stick to what your trusted educator(s) are modeling for you, the sooner you will achieve success.
This doesn’t mean to forego your own research and diligence on educators or systems. It simply means, find one you trust, and stick to it. Buy into it and get the most out of it.
How Do You Know You Have an Edge?
Dr. Steenbarger does a great job of answering this question in one of his blog posts. He essentially boils it down to two categories: backtesting or trading outcomes.
With backtesting, you can determine positive outcomes over a set period of time with certain variables and criteria. There are some great sites available for this nowadays, like Spikeet.com, if you’re inclined to go this route.
Trading outcomes, on the other hand, are more for the discretionary trader. You may not have fixed signals from your data. Rather, you’re relying on pattern recognition. For this reason, you must track your data with some degree of fixed criteria for your pattern in order to know your outcomes.
4. Master Your Setup
This is where things start to get fun. Confidence comes through knowing your probability of success.
If you knew you only had a 20% chance of success on a speculation and that you’ll lose money more often than not, would you like those odds?
What if you had a 60% chance of success and you know if you cut the 40% losers quickly enough, you’ll end up compounding your money over time?
Now what if you don’t know either one of those odds? It becomes a craps shoot. You have no idea.
Trading without mastery on a setup is gambling. And not knowing what makes your setup successful is gambling.
Speeding up the Process of Finding an Edge in Trading
Pattern recognition is the fastest way to profitability in the market without pure luck. If you want to master your setup, you must study it deeply. Replay charts, find commonalities, and even discover fundamental circumstances for your trades.
7 Things to Consider When Mastering Your Strategy:
What is the float, market cap, price, and average volume of your best winners?
If day trading, what time of day does your setup work best? Worst?
Does volume predict anything in your setup? Compared to float?
What about short % of float should you consider?
Do fundamentals like potential offerings have any affect on your strategy?
What do you observe in the tape?
How do your successful trades’ charts look visually similar
Ask around for help on what to study, what to track, what to observe. It never hurts to get a second opinion, and never be afraid to learn. If you don’t have 100s or 1000s of charts saved in a OneNote file on your computer, are you really studying?
At the end of the day, you must put in the time yourself. Even if you build off a strategy from someone else, you must make it your own. Cut out what doesn’t fit for you. Add what does.
5. Trade only Your Edge
Notice that ADF saves this for last. There is really no sense in trading until you’ve seen success in simulation. As our friend Dr. Brett Steenbarger notes, there is nothing to gain by jumping in to early. In fact, it’s incredibly reckless.
If you treat your hard-earned money with the same reckless abandon as you would at a slot machine, your chances of survival in the markets is slim.
Trading becomes easier the more confidence you build in knowing what makes your strategy work. Consider not making any real trades until you have the following defined:
What your setup is
Entry trigger/criteria based on volume/price/indicator/condition
A consistent area to define risk, every time (setting your stop out)
Rules for trade management
Your probability of success with at least 20+ tracked trades
Caveats for when the setup goes wrong
If you don’t have definitive answers for all of these. It isn’t time to trade. Head back to the sim, find your criteria, then start small.
There are two types of people who start out as traders: the systematic, disciplined type and the over-confident explorers and risk-takers.
Most of us are want to jump right in and start pushing buttons as new traders. We would encourage you take a step back and have an honest look with where your progress is.
It doesn’t really matter where you begin studying. It doesn’t matter what you study to begin with. What matters most is that you narrow your focus, observe, and orient yourself in this industry slowly and diligently. Above all, protect your capital until the time is right to employ it safely, long after you know what your trading edge is.