author Trading in the region Mark Douglas defines trading advantage as: “Nothing more than an indication of a higher probability of one thing happening rather than another.”
This market advantage must be objective and measurable, which means it is backed by numbers and statistics.
You might roll your eyes and groan, “Oh, math and spreadsheets!”
It’s not an advantage if you don’t know the odds of the outcomes!
You wouldn’t bet a lot of money on poker if you had no idea what the chances of your hand winning were, would you?
To get a reliable idea of the likelihood of your trading strategy succeeding under different market conditions, you will need to perform some backtesting over a specified period of time. long a period of time.
If the numbers do not show any consistency or strong winning probabilities, you will likely need to make some adjustments to your indicator settings or entry and exit rules.
From there, you should run more test suites to see if there are any improvements.
Market wizard Mark Minervini in his book Think and trade like a champion. He writes:
By setting my criteria in advance, I lay the foundation for whether or not my plan is working. You have to have a process, any process, but you have to have a process. Then you have a foundation from which to work, make adjustments, and perfect your process.
I know, I know… it’s a lot of hard work and it can be boring. But if you put in the time and effort, it can really pay off.
In addition to creating your own system rules and running tests, you can also choose to learn from a mentor or trading coach.
However, this is not a shortcut, as you have to do your research on whether their framework or strategy has been proven successful or not.
Furthermore, your ultimate goal should be to trade independently rather than relying on other people’s trading signals.
Recording your observations of the market, such as the reaction to a particular news release or price patterns that emerge, is also a good practice when it comes to fine-tuning your trading edge.
Knowing whether or not a setup has a high probability of winning can take a lot of the stress out of trading, even if you are still facing market uncertainty.
Having a track record of long-term consistency gives you the confidence to make trades that are consistent with your system’s rules. More importantly, it also gives you some reassurance that the strategy can recover after a loss.
Conversely, confidence in your market edge prevents you from trading recklessly or making revenge trades. It also helps you stay disciplined in sticking to your strategy rules instead of giving in to fear and greed.