Reader Q & A. Defining your edge.

How would you define your edge? How would you suggest a beginning momo trader go about defining their own?

Define an edge?

A favorable margin, An advantage, Exploiting the conditions, Recognizing opportunity from weakness or strength, The time at which chance, conditions and your skills come together. An edge is all these things. It’s also something you know and trust in 100%. It’s the basis of momentum trading. Still after all that – what is it? Only knowledge I can’t clearly define other than it’s your foot in the door of opportunity. Chart parameters.

How do you get an edge?

Through seat time watching, trial and error, learning, observing yourself and the markets, recognizing the smallest connections between supply and demand.

I have become a specialist is recognizing and acting on the starts and finishes of momentum. That is one of my edges. And to take advantage of these opportunities I can apply my 2^nd edge – a clear trading plan and system for managing the trade, profits or losses that works with my mental strength and personality. One without the other is useless.

I outlined one set of trading parameters that I recognize as an edge here: http://fearandgreedtrader.blogspot.com/2010/03/fngs-free-strategy-of-week-finger.html#links

A simple (all the best edges for anything are simple) way to trade that doesn’t require thought or opinion only observation. Managing the trade like that comes down to common sense as in I will sell and take profits when it stops going in the direction it’s going.

Another part that comprises an edge is keeping your goals in the forefront of your mind. Cut those losers, let the winners tell you when to sell them, never risk so much that it affects you, - trade your plan. All these things can be like a broken record in your subconscious that can spur you on. That is why concentration is vital as the foundation of your success. It is an edge in itself.

Another part is reading basic human emotion and under what conditions they typically occur. When you can trade in a manner that is detached from the emotion driving the markets and trade to take advantage of them instead you are in the drivers seat to profits instead of a passenger in control of nothing. Not even your own emotions.

AS you can see there are many different aspects that can make up an edge without hardly touching on the myriad of charting parameters that could initiate it.

Take the VECO trade shown here from today. 1st chart is short entry 2nd chart is exit. VECO is on my watchlist because it is a good mover with the things that are important to me, a small spread, good volume, good daily trading range.

AS VECO makes a new daily low it pops up on my making new lows list. Opportunity knocks. EDGE.

The previous low was the opening candle of the morning. So looking at the chart, some traders might say it’s already dropped .80 in the last 25 minutes how much lower is it going to go. I’m not thinking of that, instead I’m thinking it has just hit fresh lows and traders who bought it at the open and didn’t take profits are now seeing losses, fear or disgust. EDGE.

Experience also lets me wait for when just before the new five minute candle will appear to start my short trade based on what it did during 2 of the previous 3 candles. Look and you will see it retraced to the change of candles then dropped right away. I like those odds. EDGE.

So those were the chart parameters of the trade. Then it is a function of managing the trade. Set the stop(define the risk). EDGE.

Wait for the momentum to stop. In this case it didn’t so 5 minutes before the end of the day it is time to take A $1 run in profits. EDGE.

Every trade is not as clinical as this but hopefully you can see how it all fits together.