Think fast — what’s your trading edge?
Have you mastered the basics but still struggle to hit a stride? You might be missing your trading edge.
It’s the difference between following the crowd and finding your own winning formula.
You know how I always warn you about chat rooms … and when I talk about a stock, I always tell you to do your own research. If you listen to my daily premarket briefings, you know I only want to help you find your own way…
I want you to listen to my thought process on the way to developing your own. You know, give someone a fish vs. teach someone to fish…
Why is that?
There’s a Warren Buffett quote I love: “Be fearful when others are greedy, and greedy when others are fearful.”
Buffett says this because the market is just a complicated system of supply and demand. If you aren’t trading with an edge and you’re hunting for random stocks on Twitter…
Chances are you’ll be late to the supply side of things.
Table of Contents
- 1 What Is a Trading Edge?
- 2 The Importance of Having an Edge in the Market
- 3 How to Develop Your Trading Edge
- 4 Conclusion
What Is a Trading Edge?
I think of a trading edge in simple terms.
This is my formula: Strategy + Rules = Trading Edge
Strategies are essential in the stock market. But when everyone’s using the same strategy, it ceases to be effective. It may be a fine strategy, but if you’re looking for an edge in your trading, you’ve got to make it unique.
The human brain tends to understand the idea of supply and demand on a one-to-one level. If I have something that someone wants, it’s a sellers’ market, right?
The market expands supply and demand to thousands, even millions, of people. But most people are still thinking on that individual level.
What does it mean when millions of people have the same thought about a stock being in demand … and then they all make similar trades?
Those people are what we call lemmings. And sooner or later, they’re gonna get burned.
(Psst! Have you signed up for the no-cost StocksToTrade weekly watchlist? Do it now to find out which stocks and market trends I’m watching every week!)
Example of a Trading Edge
You see a stock going up. It’s human nature to want in. But every time you jump in on the rally … it falls.
What you’re employing here is a strategy of buying breakouts … just like a ton of other traders.
But a lot of these traders are booking profits, and you’re not. What are they doing differently?
In the video below, I give you some of the rules I put on my breakout strategy.
This is how you can find your edge in a stock … It’s the way to narrow down the biggest percentage gainers into potential trades.
I look for four things:
- Earnings winners: This is one of the most important news catalysts out there. Think about the difference between a stock breaking out on earnings and one that’s up on a dumb tweet.
- Revenue and positive cash flow: Multi-day and multi-week moves are more likely for quality stocks. How can you tell if you’re looking at a quality stock? A good sign is that it’s actually making sales.
- High volume and price action: These are the two most important indicators. You want your stock to be breaking key resistance levels, like 52-week highs. And you want it to be in demand — trading at unusual volume.
- Hot sectors: This is another key sign that a stock is going to continue to attract interest.
Most other traders aren’t thinking on all of these levels. When you start putting this kind of work in, you start to take the gambling out of trading.
The Importance of Having an Edge in the Market
A lot of traders use technical indicators to give them confirmation. And a bonus — they cut down on competition.
I won’t get too deep into indicators here. You know I like to keep it simple. You need to understand what it means when a nine-day EMA crosses a 20-day EMA. But remember, this is just one more sign.
What’s another sign? When a stock breaks a 52-week high … and this one might be a bit easier to understand.
You might figure on there being ‘bag holders’ that bought it back in that case. This is the kind of thing traders learn not to do from the SteadyTrade Team. Staying in a losing trade is one of our big no-nos. Learn how you can set safer trading rules for yourself with twice-daily mentorship and much more — join the SteadyTrade Team today.
Now, guess what happens when a stock regains its previous high? A lot of those bag holders sell.
So we want to wait to see if the stock continues to break above that previous high. If so, that gives us confirmation that our idea was right.
Traders with an edge have a lot of these little tricks. They buy a stock for more than the fact that Elon Musk said something about it. Although that might be the exception…
Check out the crazy move Signal Advance (OTCPK: SIGL) made in January after traders mistook it for the stock behind the Signal app!
How to Develop Your Trading Edge
Everyone wants to sell you a trading edge. Merrill Edge Trading, Winners Edge Trading, Schwab’s StreetSmart Edge … these platforms stick the word on like it’s magic.
But your edge in trading has to be something that makes sense for YOU.
If you’re a math type, some of the more technical styles might make sense.
If you want to build your trading edge on psychology, work on your mental edge. Check out books like “The Psychology of Trading: Tools and Techniques for Minding the Markets” by Brett N. Steenbarger. It’s one of my favorites.
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Learn Different Strategies
Your personality, lifestyle, and goals play big parts in picking a strategy.
When you find a strategy that fits you, it’s like trying on the perfect pair of jeans. You never want to take it off.
But that’s a good way to lose your edge. No strategy works forever. The reasons are the typical ones leading to a dulled edge in trading. Other traders catch on.
When that happens, you need to adapt.
Practice With Paper Trading
When you try out new strategies and patterns, the safest way to try them is by paper trading.
What is the best paper trading site or platform? I’m biased, of course, but I think it’s StocksToTrade. StocksToTrade uses real-time stock quotes and volume. A lot of other platforms out there don’t.
This means you’ll get more accurate order fills as if you were trading with real money.
One of the big problems with paper trading is that it’s not the same as actually trading. The delay in market data is one reason. That’s why StocksToTrade gets you closer to the real thing.
In this video, I demo StocksToTrade paper trading on a short sale. Short selling allows you to trade a whole different side of a price move. But it also gives you the potential for unlimited losses.
That’s exactly why it’s a good example of strategy to paper trade before you try it for real. But you can use paper trading to take many strategies for a spin, whether you’re a new trader or testing a new pattern.
Check out our paper trading feature and so much more. Take STT for a two-week test spin — it’s just $7.
Find Trading Software You Like
When you’re ready, you can switch over to StocksToTrade’s actual trading side.
I think it’s one of the best platforms out there for building a trading edge. It can help traders find trades that fit their criteria.
It has a wide range of indicators to apply to stocks on your watchlist. And it gives you some of the cleanest charts out there.
Maybe you’ve honed your edge on news catalysts … Its robust news scanner can help you find news for stocks.
Refine and Improve Over Time
This step is key to discovering what your edge ratio is. Your edge ratio, or ‘e-ratio,’ calculates how often trades go in your favor.
You need to write this down to know what the most profitable trading strategies are for you. If you don’t study your past trades, you won’t improve.
You can do this by keeping a trading journal.
Journaling all your trades is key for your discipline. It’ll show your strengths and weaknesses. And it will give you evidence of when your trading edge no longer gives you an edge.
Find a Team to Help You
Our SteadyTrade Team connects experienced traders with traders just starting out.
One of the things that makes our team special is that we actually show our work. We don’t just tell you about our trades, we share the strategy behind them.
We’ve even got worksheets to help you break down the rules we put on our strategies. Your rules might end up different. But you’ve got to learn what something looks like before you can create it yourself.
Traders with an edge see a different level of trading than the average trader. They avoid tunnel vision. They work to try to consider all the angles that might play out.
Even if you can’t ‘see the field’ like this yet it’s good to look ahead. The more you study, the more you can understand how stocks and the market move.
Just know this: I’m rooting for you. I don’t want you to approach the market like a gambler, blinded by unrealistic hopes. Instead, think about how you can improve — even a little bit — each and every day.
What’s your trading edge? Has this article made you think you need to cultivate one? Let me know in the comments!