Friday, April 13, 2012

Your trading edge

A trader will pick up a few skills after trading for a while. If those skills are better than the average trader, he gains a small edge over other market participants. These skill sets are common across trading systems:

  1. Correctly determine market direction
  2. Roughly estimate how far the market is likely to move
  3. Find precise entries
  4. Determine stop size for an entry.
  5. Hold through the trade and not be shaken out by any minor pullbacks or loosen stops
  6. Hold a winner for extended duration
  7. Gain important market information from losing trades and apply to next trade

Once you have identified your edges, tailor your trading to amplify those edges and insulate yourself from market action where you don't have an edge.

For example, if you can gauge market direction and estimated move accurately but your entries usually get stopped out, consider trading options instead. For example, if you estimated a 10 point down day in the first few bars but would usually be stopped out if you tried a price action entry (as I was on my b4 short), you could simply buy SPY puts in the AM and hold it till it reaches your target or till end of the day and exit with a profit.

On the other hand, if your sense of direction is weak and consequently you have no ability to hold a position for too long, but you can enter and exit precisely, you can take multiple small scalps with small fixed profits.


  1. Cadaver, I recall somebody in the comments recently noting that you regularly used money stops (of I believe 1 or 1.5 points) rather than price action stops (say, 1 tick beyond the previous bar): Do you have a post where you explain your reasoning for doing so? Or, simply, why do you use money stops? And what size? After completing a study of my trades over a period of 6 months of strong trading, I began using 1.5 point money stops. I am now, however, using a mix of the two.

    1. The closest post I can think of is

      Fixed stops (1.5 for ES) are more likely to enable you to sit though a trade without being shaken out. If a stop is larger than normal, you may not have mentally accepted the risk and be shaken out. Often large stops are always hit if the trade is unsuccessful, so I don't use them anymore.

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  3. Hi Cad,

    For your fH2 trade, is b6 the actual H2? did you place an order below b5 after b6 went above it? If yes, when would you cancel that order if b6 didn't trigger?

    Thanks a lot for your time.

    1. Yes, b6 is the actual H2 and order was placed after it took out b5 high. There is a very good chance I would cancel if b6 did not trigger unless it gave a strong bear close.

  4. Cad, I have 1 more question if you don't mind...

    why isn't b5 a fL2 set up on march 5, 2012? it looks like 2 failed attempts to go below b1.

    thank you.

    1. It is an fL2 and it did move up.

      fH2 is a setup suitable for weak open (gap down or below ema, 1st bar bear, etc). fL2 is not a good setup when the open is weak, you are better off waiting for a W reversal. fH2 is a weak setup when the open is strong (gap up) and you are better off waiting for a W reversal.

    2. thank you Cad! also, the way you defined an edge in this post is just brilliant, how long have you been studying the markets to gain this level of insight?

    3. I'm not going to pretend that all these insights are mine. A lot of them I picked from other traders and refined using my experiences. I'm able to explain them in a simpler way but thats because I need to do it for my own sake as well.