How To Cultivate A Trading Edge

Enjoying a lucrative career as a professional forex trader is, of course, the holy grail… something that all traders seek out and aspire to, but which remains elusive to the vast majority, just out of reach no matter how hard they try.


Trading requires a range of different skills and aptitudes, which will need to be worked on and developed over months and years if you do want to hit the big time and this often proves to be something of a stumbling block for many would-be traders.


Putting in the hard work and turning the lens inward can be a little uncomfortable and you have to park your ego at the door in order to improve your self-awareness and see what needs to be done so you can achieve your ultimate goals in life.


But if you are able to look at yourself objectively and if you can identify your personal strengths and weaknesses, you can then start to consider what practical steps you need to take so you can address your vulnerabilities and turn them into strengths themselves.


This can be incredibly empowering and is sure to translate into success on the trading floor if you keep your eye on the ball and let go of anything that doesn’t serve you and your ambitions.


Being more insightful can also help you work out what your trading edge is, something that all the top traders out there focus on in order to drive consistent profits their way. Of course, you can be successful as a trader without discovering your own unique edge, but it’s likely that you’ll plateau at a certain point – or, worse, you may even see your losses start to accumulate.


So what exactly is a trading edge… and how do you go about getting one?


Trading edges explained


No two trading edges are ever the same and it comes down to the individual as to what their emerging edge becomes. When you first start trading, don’t expect to discover your edge immediately. All the best things take time and as you trade, you’ll find that your edge starts to make itself known the more your other skills develop.


It could be something specifically related to the markets themselves or it could be something more personal, some kind of attribute or characteristic you have that could help you make profits in situations where others might fail. In forex trading, losses are an absolute certainty but an edge can help you maximise your wins and keep any losses to a minimum.


Once you’ve found your edge, you can then use it to help you work out what currency pairs to trade and how to go about trading them, including your entry and exit strategies. The idea is that by applying your edge consistently over the long term when certain market events and conditions are triggered, it will lead to profit more often than not.


How to develop your trading edge


Trading without an edge is more like gambling than anything else, where your decisions are made based on a whim, when you just decide to take a punt and see what happens.


Once you’ve identified your trading edge (and you will probably have more than one!), you can apply it extensively to all your trades so you know you’re making decisions based on actual facts and analysis, rather than just a ‘cross your fingers and hope’ attitude.


In terms of developing your edge, you first need to find it. If you have a hunch, pursue it and see where it leads. You may find that it’s a non-starter, in which case you’ll need to go back to the drawing board and think again, but this trial and error approach is the best way to go about identifying a successful edge, one that puts you well ahead of the competition.


Once you think you’ve found a workable edge, you’ll want to put it through its paces and this is where backtesting really comes into its own. Of course, you can just jump straight into live trading but this could quickly spell disaster, which is why the top traders out there will always backtest their new strategies to see how they stand up.


By backtesting, you will be able to see how your strategy performs against historical data (there’s software out there that can help you with this). It’s important to remember that backtesting won’t help you predict what’s likely to happen in the future, but you can better identify the strengths and weaknesses of your latest strategy by seeing how it would have performed in the past.


If you find that your latest strategy wouldn’t have done so well in the past, it’s highly likely that it will struggle in the future, so at this point you would need to review and improve it, or discard it altogether. If you want to forge ahead, you can forward test your new idea using a demo account for a couple of months before risking any of your trading capital.


Always bear in mind, however, that true edges can be tricky to find and the vast majority of ideas will fall apart when tested… so be prepared to fall down and get back up many, many times before you do discover a workable edge that could drive potential profits your way.


Be wary of curve fitting


Something to be on your guard against while backtesting your latest trading edge ideas and strategies is curve fitting.


Backtesting trading systems on historical data is incredibly useful, but it can also steer you in the wrong direction, since these systems are themselves designed based on this historical data… and bending the rules to fit a precise data set won’t work when you try to apply this to real-time trading.


With curve fitting, the trading strategy is adjusted to match exact market conditions during the backtesting process, including assets, timeframes, overselling, overbuying, volume, spread, range and so on… and these exact conditions will never be repeated in the future, so developing a strategy based on curve fitting could see you take some big hits.


Give it time!


When it comes to trading, it’s important to remember that it’s a long-term game. If you think in the short term, your trading strategies will never yield the results you’re looking for, not because they’re not robust enough but because you haven’t given them sufficient time to work their magic.


Strategy hopping can see you run into trouble but it’s a trap that many inexperienced traders can fall into when they see their latest idea starting to falter a little. You need to make sure you’re giving your strategies enough time to perform consistently so they converge towards the expected value that you will have defined in your analysis.


Using a demo account can really help you when you’re first starting out, giving you the confidence you need to trade in real life, with real money. Patience is a real skill and something that will stand you in excellent stead as a trader, so give yourself the time and space you need to develop in certain areas before piling on the pressure and trading for real.


You could also consider paper trading to help you practise and try out new strategies and ideas. This is a simulated trade that will allow you to practise buying and selling without having to risk any of your capital.


Here, you record all your trades by hand instead of using technology to track trading positions, profits and losses, although to get the most out of it you will still need to ensure you’re following genuine trading practices and objectives.


Of course, because there is no real risk when you’re paper trading, you may find your investment returns are somewhat distorted and you may also find that your reactions and decisions are different than when there’s real money in play.


As such, making the move to a live account sooner rather than later can help you develop as a trader… so don’t get too comfortable with paper trading. After all, the name of the game is to make money – and you can’t do that when you’re simulating trading!


You will also only really be able to fully develop your trading edge when you’re engaging with the markets on a regular basis in real life. Immersion is the key to success when it comes to forex trading and if you want to make a lucrative career for yourself, you really do have to give it your all.


If it’s something you’d like to pursue in the new year, our forex funding programmes could be just what you’re looking for to help you get started. We currently have a holiday promotion running with ten per cent off all programmes, with double max trading day add-ons available free of charge.

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FTUK Funded Account Disclaimer

CFTC Rule 4.41 – Hypothetical or Simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, because the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs, in general, are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

All our funded accounts come with a fixed equity stop out level. Once the account equity level gets below this fixed stop out bar, we will close all running trades and disable trading and access. The stop out level is a fixed value for each funding level, this means that any profit which has been made by the trader increases the loss allowance.

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