Trading is not just a way to make money, it is a science that requires a deep understanding of the market, analysis, and strategy. In this article, we will explore how traders can gain a competitive advantage by utilizing various methods and approaches based on experience, knowledge, statistics, and analytics.
Familiar phrases, right? I’m sure you’ve encountered such formulations many times if you’ve been trading in the market for several years. However, in my subjective opinion, the essence of the problem of gaining a market edge is extremely individual. Moreover, I firmly believe that it is impossible to acquire an advantage solely through theoretical knowledge, no matter how advanced it may be, without significant practical trading experience, without having "bumped your head" hundreds of times, and without blowing a few real, not demo, accounts.
The search for an edge is about finding a comfort zone in trading. It’s about achieving that psycho-emotional state and those market conditions in which you personally feel comfortable trading consciously, understanding why you entered the market and where you will exit. Trading without haste, with setups that are justified primarily for your rational mind, which is our brain. At the same time, you must be unified and whole; you should not have to persuade and convince your "inner controller" why you are doing what you are doing. If you can immerse yourself in such a state and achieve that alignment of soul and mind, you will rise to that level where no more than 10% of all traders in the world reside, and over time, you may take another step and join the ranks of consistently successful traders, of whom there are no more than 1-2% on the entire planet. Do you think it’s worth it? The answer is quite obvious.
As I mentioned earlier, and I am convinced of this, everyone has their unique path to finding their personal edge. Below, I will briefly outline my personal advantage and the tools that help me maintain that unity and integrity, allowing me to make conscious and rational decisions about entering the market.
1. Understanding the Market and Its Participants
The first step to gaining an edge in trading is understanding the market structure and its participants. Statistics show that 95% of retail traders lose money. This is because most of them do not understand how the market functions and how more experienced participants operate. The market does not create added value; it redistributes money among participants. Therefore, it is crucial to study the behavior of our fellow retail traders and understand how they (like us) make decisions.
2. Utilizing Market Sentiment
Market sentiment is an indicator of the moods of market participants that can help traders make more informed decisions. By analyzing open positions, traders can determine where the "bulls" and "bears" are concentrated. Utilizing sentiment data, such as COT (Commitment of Traders) reports, can provide insights into how large market participants are positioned and what trends may emerge.
3. Chart Analysis and Patterns
Chart analysis is a powerful tool that allows traders to visualize price movements and identify patterns. However, it is important to understand that patterns do not always work and may not apply to all participants. Experienced traders use chart analysis to find "suffering" participants in the market to determine where spikes in activity may occur and how this could impact price.
4. Analyzing Options Data
Options provide unique opportunities for market analysis. By using platforms like CME Exchange, traders can track options portfolios and identify potential entry points. By analyzing the dynamics of options sentiment, traders can predict where an asset's price may move based on the actions of large options traders and even identify the actions of Insiders who know exactly what they are doing and why.
5. Risk Management and Money Management
Risk management is a key aspect of successful trading. Traders must establish clear rules for limiting losses and determining position sizes. For example, it is widely recommended to limit daily risk to 1-2% of capital. This is quite a lot. In other words, after 10 losing trades, you could lose 10% of your capital, which will likely trigger a desire to "get it back" quickly. In other words, "welcome" back to the origins and childhood trading ailments. My personal observation, based on experience, is to limit potential loss in a trade to no more than 0.5% of capital, but even less is better.
Conclusion
Gaining an edge in trading requires time and patience. Find the tools and data that carry meaningful weight for you and seem, or better yet, are justified and based on real data and sentiment. Then test or simply observe over an extended period how this data influences market activity, whether a causal relationship or signs of recurring patterns emerge. But the main condition is the internal acceptance of this information as justified; there should be no internal conflict. Of course, if a seemingly justified approach or system does not withstand the test of time, move on to a new "hypothesis" without regrets. However, each time, apply that "internal filter" to avoid mechanically using an approach that lacks meaning and logic for you. It’s crucial to remember that trading is a long game, and success comes to those who are willing to learn and work on themselves.